UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
001-34809
Commission File Number
GLOBAL INDEMNITY GROUP, LLC
(Exact name of registrant as specified in its charter)
Delaware
85-2619578
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer Identification No.)
Three Bala Plaza East, Suite 300
Bala Cynwyd, PA
19004
(Address of principal executive office including zip code)
Registrant's telephone number, including area code: (610) 664-1500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit such files.). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
☐;
Accelerated filer
☒;
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Class A Common Shares
GBLI
NASDAQ Global Select Market
7.875% Subordinated Notes due 2047
GBLIL
As of July 28, 2021, the registrant had outstanding 10,515,177 Class A Common Shares and 3,947,206 Class B Common Shares.
TABLE OF CONTENTS
Page
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements:
3
Consolidated Balance Sheets As of June 30, 2021 (Unaudited) and December 31, 2020
Consolidated Statements of Operations Quarters and Six Months Ended June 30, 2021 (Unaudited) and June 30, 2020 (Unaudited)
4
Consolidated Statements of Comprehensive Income (Loss) Quarters and Six Months Ended June 30, 2021 (Unaudited) and June 30, 2020 (Unaudited)
5
Consolidated Statements of Changes in Shareholders’ Equity Quarters and Six Months Ended June 30, 2021 (Unaudited) and June 30, 2020 (Unaudited)
6
Consolidated Statements of Cash Flows Six Months Ended June 30, 2021 (Unaudited) and June 30, 2020 (Unaudited)
7
Notes to Consolidated Financial Statements (Unaudited)
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
43
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
66
Item 4.
Controls and Procedures
PART II – OTHER INFORMATION
Legal Proceedings
67
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
68
Signature
69
2
Item 1. Financial Statements
Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
June 30, 2021
December 31, 2020
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost: $1,150,603 and $1,149,009; net of allowance for expected credit losses of $0 at June 30, 2021 and December 31, 2020)
$
1,174,097
1,191,186
Equity securities, at fair value
90,669
98,990
Other invested assets
166,003
97,018
Total investments
1,430,769
1,387,194
Cash and cash equivalents
49,105
67,359
Premium receivables, net of allowance for expected credit losses of $2,822 at June 30, 2021 and $2,900 at December 31, 2020
123,932
109,431
Reinsurance receivables, net of allowance for expected credit losses of $8,992 at June 30, 2021 and December 31, 2020
90,247
88,708
Funds held by ceding insurers
33,793
45,480
Deferred federal income taxes
37,169
34,265
Deferred acquisition costs
69,061
65,195
Intangible assets
20,698
20,962
Goodwill
6,521
Prepaid reinsurance premiums
15,141
12,881
Lease right of use assets
19,979
21,077
Other assets
40,902
45,835
Total assets
1,937,317
1,904,908
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses
697,618
662,811
Unearned premiums
308,984
291,495
Ceded balances payable
14,339
8,943
Payable for securities purchased
3,707
4,667
Contingent commissions
6,420
10,832
Debt
126,359
126,288
Lease liabilities
21,566
22,950
Other liabilities
48,759
58,598
Total liabilities
1,227,752
1,186,584
Commitments and contingencies (Note 12)
—
Shareholders’ equity:
Series A cumulative fixed rate preferred shares, $1,000 par value; 100,000,000 shares authorized, shares issued and outstanding: 4,000 and 4,000 shares, respectively, liquidation preference: $1,000 per share and $1,000 per share, respectively
4,000
Common shares: no par value; 900,000,000 common shares authorized; class A common shares issued: 10,532,270 and 10,263,722 respectively; class A common shares outstanding: 10,515,177 and 10,263,722, respectively; class B common shares issued and outstanding: 3,947,206 and 4,133,366, respectively
Additional paid-in capital
447,804
445,051
Accumulated other comprehensive income, net of tax
18,968
34,308
Retained earnings
239,272
234,965
Class A common shares in treasury, at cost: 17,093 and 0 shares, respectively
(479
)
Total shareholders’ equity
709,565
718,324
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
Consolidated Statements of Operations
(In thousands, except shares and per share data)
Quarters Ended June 30,
Six Months Ended June 30,
2021
2020
Revenues:
Gross written premiums
175,236
164,549
338,794
320,273
Net written premiums
160,653
147,264
308,336
286,376
Net earned premiums
149,408
141,847
293,108
286,315
Net investment income (loss)
10,633
(2,359
20,469
7,770
Net realized investment gains (losses)
3,833
38,507
7,652
(29,655
Other income
521
766
898
931
Total revenues
164,395
178,761
322,127
265,361
Losses and Expenses:
Net losses and loss adjustment expenses
90,938
67,297
181,721
144,944
Acquisition costs and other underwriting expenses
57,213
53,578
111,977
109,990
Corporate and other operating expenses
6,329
8,618
10,605
12,841
Interest expense
2,696
4,712
5,291
9,577
Income (loss) before income taxes
7,219
44,556
12,533
(11,991
Income tax expense (benefit)
844
7,005
641
(4,964
Net income (loss)
6,375
37,551
11,892
(7,027
Less: preferred stock distributions
110
220
Net income (loss) available to common shareholders
6,265
11,672
Per share data:
Net income (loss) available to common shareholders (1)
Basic
0.43
2.63
0.81
(0.49
Diluted
2.61
0.80
Weighted-average number of shares outstanding
14,412,446
14,275,500
14,396,523
14,262,525
14,681,731
14,389,400
14,651,124
Cash dividends/distributions declared per common share
0.25
0.50
(1)
For the six months ended June 30, 2020, weighted average shares outstanding – basic was used to calculate diluted earnings per share due to a net loss for the period.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses)
9,477
33,229
(15,701
31,196
Reclassification adjustment for (gains) losses included in net income (loss)
(295
(9,388
(11,101
Unrealized foreign currency translation gains (losses)
(67
1,292
(160
(11
Other comprehensive income (loss), net of tax
9,115
25,133
(15,340
20,084
Comprehensive income (loss), net of tax
15,490
62,684
(3,448
13,057
Consolidated Statements of Changes in Shareholders’ Equity
Number of Series A Cumulative Fixed Rate Preferred Shares
Number at beginning and end of period
Number of class A common shares issued:
Number at beginning of period
10,303,832
10,305,404
10,263,722
10,282,277
Common shares issued under share incentive plans, net of forfeitures
22,540
(346
42,644
Common shares issued to directors
19,738
28,482
39,744
51,609
Share conversion
186,160
Number at end of period
10,532,270
10,333,540
Number of class B common shares issued:
4,133,366
(186,160
3,947,206
Par value of Series A Cumulative Fixed Rate Preferred Shares
Balance at beginning and end of period
Par value of class A common shares:
1
Par value of class B common shares:
Additional paid-in capital:
Balance at beginning of period
446,199
443,641
442,403
Share compensation plans
1,605
1,532
2,753
2,770
Balance at end of period
445,173
Accumulated other comprehensive income, net of deferred income tax:
9,853
12,560
17,609
Other comprehensive income (loss):
Change in unrealized holding gains (losses)
9,182
23,841
(15,180
20,095
Other comprehensive income (loss)
37,693
Retained earnings:
236,688
222,549
270,768
Preferred share distributions
(110
(220
Dividends / distributions to shareholders ($0.25 per share per quarter in 2021 and 2020)
(3,681
(3,658
(7,365
(7,299
256,442
Number of treasury shares:
9,993
119,945
115,221
Class A common shares purchased
7,100
16,915
4,724
Retirement of shares
159
Forfeited shares
178
17,093
120,104
Treasury shares, at cost:
(283
(4,116
(3,973
Class A common shares purchased, at cost
(196
(143
735,194
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization and depreciation
4,176
3,463
Amortization of debt issuance costs
71
132
Restricted stock and stock option expense
2,769
Amortization of bond premium and discount, net
3,043
2,941
Net realized investment (gains) losses
(7,652
29,655
(Income) loss from equity method investments, net of distributions
(1,658
11,489
Changes in:
Premium receivables, net
(14,501
(7,265
Reinsurance receivables, net
(1,539
(7,151
11,485
749
34,807
20,892
17,489
(800
5,396
3,256
Other assets and liabilities
(8,377
625
(4,412
(3,252
Federal income tax receivable/payable
5,478
(3,866
558
(2,260
862
Net cash provided by operating activities
47,488
52,410
Cash flows from investing activities:
Proceeds from sale of fixed maturities
636,040
427,111
Proceeds from sale of equity securities
42,821
378,915
Proceeds from maturity of fixed maturities
38,459
15,651
Proceeds from maturity of preferred stock
666
Proceeds from other invested assets
2,673
623
Amounts paid in connection with derivatives
(276
(20,060
Purchases of fixed maturities
(680,805
(457,841
Purchases of equity securities
(27,402
(358,085
Purchases of other invested assets
(70,000
(297
Net cash used for investing activities
(57,824
(13,983
Cash flows from financing activities:
Net borrowings under margin borrowing facility
958
Dividends / distributions paid to common shareholders
(7,219
(7,120
Distributions paid to preferred shareholders
Purchases of class A common shares
Net cash used for financing activities
(7,918
(6,305
Net change in cash and cash equivalents
(18,254
32,122
Cash and cash equivalents at beginning of period
44,271
Cash and cash equivalents at end of period
76,393
1.
Principles of Consolidation and Basis of Presentation
References to “the Company” refer to Global Indemnity Group, LLC and its subsidiaries. If prior to August 28, 2020, references to the Company refer to Global Indemnity Limited and its subsidiaries.
Global Indemnity Group, LLC, a Delaware limited liability company formed on June 23, 2020, replaced Global Indemnity Limited, incorporated in the Cayman Islands as an exempted company with limited liability, as the ultimate parent company of the Global Indemnity group of companies as a result of a redomestication transaction completed on August 28, 2020. Global Indemnity Group, LLC’s class A common shares are publicly traded on the NASDAQ Global Select Market under the ticker symbol GBLI. Global Indemnity Group, LLC’s predecessors have been publicly traded since 2003. See Note 2 of the notes to the consolidated financial statements in Item 8 Part II of the Company’s 2020 Annual Report on Form 10-K for additional information regarding the redomestication.
Global Indemnity Group, LLC is a holding company that is classified as a publicly traded partnership for U.S. federal income tax purposes and meets the qualifying income exception to maintain partnership status.
Global Indemnity Group, LLC owns all shares of its direct and indirect subsidiaries, including those of its insurance companies: United National Insurance Company, Diamond State Insurance Company, Penn-America Insurance Company, Penn-Star Insurance Company, Penn-Patriot Insurance Company, and American Reliable Insurance Company.
The insurance companies’ primary activity is providing insurance products across a distribution network that includes binding authority, program, brokerage and reinsurance. The insurance companies are managed through four business segments: Commercial Specialty, Specialty Property, Farm, Ranch & Stable, and Reinsurance Operations. The Company’s Commercial Specialty segment offers specialty property and casualty insurance products in the excess and surplus lines marketplace. The Company manages Commercial Specialty by differentiating them into four product classifications: 1) Penn-America, which markets property and general liability products to small commercial businesses through a select network of wholesale general agents with specific binding authority; 2) United National, which markets insurance products for targeted insured segments, including specialty products, such as property, general liability, and professional lines through program administrators with specific binding authority; 3) Diamond State, which markets property, casualty, and professional lines products, which are developed by the Company’s underwriting department by individuals with expertise in those lines of business, through wholesale brokers and also markets through program administrators having specific binding authority; and 4) Vacant Express, which primarily insures dwellings which are currently vacant, undergoing renovation, or are under construction and is marketed through aggregators, brokers, and retail agents. These product classifications comprise the Company’s Commercial Specialty business segment and are not considered individual business segments because each product has similar economic characteristics, distribution, and coverage. The Company’s Specialty Property segment offers specialty personal lines property and casualty insurance products through general and specialty agents with specific binding authority. The Company’s Farm, Ranch & Stable segment provides specialized property and casualty coverage including Commercial Farm Auto and Excess/Umbrella Coverage for the agriculture industry as well as specialized insurance products for the equine mortality and equine major medical industry. These insurance products are sold through wholesalers and retail agents, with a selected number having specific binding authority. Collectively, the Company’s insurance subsidiaries are licensed in all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The Company’s Reinsurance Operations segment provides reinsurance solutions through brokers and primary writers including insurance and reinsurance companies. Prior to the redomestication transactions, the Company’s Reinsurance Operations consisted solely of the operations of its Bermuda-based wholly-owned subsidiary, Global Indemnity Reinsurance Company, Ltd. (“Global Indemnity Reinsurance”). As part of the redomestication transactions, Global Indemnity Reinsurance was merged with and into Penn-Patriot Insurance Company ("Penn-Patriot"), with Penn-Patriot surviving, resulting in the assumption of Global Indemnity Reinsurance's business by the Global Indemnity group of companies’ existing U.S. insurance company subsidiaries. The Commercial Specialty, Specialty Property, Farm, Ranch & Stable, and Reinsurance Operations segments comprise the Company’s insurance operations.
The interim consolidated financial statements are unaudited, but have been prepared in conformity with United States of America generally accepted accounting principles (“GAAP”), which differs in certain respects from those principles followed in reports to insurance regulatory authorities. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The unaudited consolidated financial statements include all adjustments that are, in the opinion of management, of a normal recurring nature and are necessary for a fair statement of results for the interim periods. Results of operations for the quarters and six months ended June 30, 2021 and 2020 are not necessarily indicative of the results of a full year. The accompanying notes to the unaudited consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements contained in the Company’s 2020 Annual Report on Form 10-K.
The consolidated financial statements include the accounts of Global Indemnity Group, LLC and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. An adjustment has been made to the Consolidated Balance Sheets for the fiscal year ended December 31, 2020 to present the lease right of use assets and lease liabilities separately from other assets and other liabilities, respectively. This change in classification does not affect previously reported Assets or Liabilities in the Consolidated Balance Sheet.
2. Summary of Significant Accounting Policies
There have been no significant changes to the Company's accounting policies during the current year except for the following:
The receipt of results for investments in limited partnerships and limited liability companies may vary. If results are received on a timely basis, they are included in current results. If they are not received on a timely basis, they are recorded on a one quarter lag. The recording of such results are applied consistently for each investment once the timing of receiving the results has been established.
Please see Note 3 of the notes to the consolidated financial statements in Item 8 Part II of the Company's 2020 Annual Report on Form 10-K for more information on the Company's summary of significant accounting policies.
3.
Investments
The amortized cost and estimated fair value of the Company’s fixed maturities securities were as follows as of June 30, 2021 and December 31, 2020:
(Dollars in thousands)
Amortized
Cost
Allowance for Expected Credit Losses
Gross
Unrealized
Gains
Losses
Estimated
Fair Value
As of June 30, 2021
U.S. treasuries
148,611
1,278
(2,840
147,049
Agency obligations
10,628
(56
10,577
Obligations of states and political subdivisions
62,666
2,829
(9
65,486
Mortgage-backed securities
306,158
4,190
(2,151
308,197
Asset-backed securities
131,543
1,301
(229
132,615
Commercial mortgage-backed securities
106,120
4,160
(247
110,033
Corporate bonds
265,316
12,097
(973
276,440
Foreign corporate bonds
119,561
4,374
(235
123,700
Total fixed maturities
1,150,603
30,234
(6,740
9
As of December 31, 2020
195,444
3,125
(1,089
197,480
58,140
3,170
61,243
351,453
7,876
(551
358,778
116,349
1,890
(646
117,593
105,509
6,094
(644
110,959
223,387
17,703
(373
240,717
98,727
5,716
(27
104,416
1,149,009
45,574
(3,397
As of June 30, 2021 and December 31, 2020, the Company’s investments in equity securities consist of the following:
Common stock
68,261
60,379
Preferred stock
22,408
11,683
Index funds that invest in fixed maturities
26,928
Total
As of June 30, 2021 and December 31, 2020, the Company held Fannie Mae mortgage pools that totaled 2.6% and 3.9% of shareholders’ equity, respectively. Excluding the Fannie Mae pools, U.S. treasuries, agency bonds, index funds, limited liability companies, and limited partnerships, the Company did not hold any debt or equity investments in a single issuer in excess of 2.2% and 1.9% of shareholders' equity at June 30, 2021 and December 31, 2020, respectively.
The amortized cost and estimated fair value of the Company’s fixed maturities portfolio classified as available for sale at June 30, 2021, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Due in one year or less
39,545
39,976
Due in one year through five years
181,497
189,605
Due in five years through ten years
294,129
298,071
Due in ten years through fifteen years
31,684
32,641
Due after fifteen years
59,927
62,959
10
The following table contains an analysis of the Company’s fixed income securities with gross unrealized losses that are not deemed to have credit losses, categorized by the period that the securities were in a continuous loss position as of June 30, 2021. The fair value amounts reported in the table are estimates that are prepared using the process described in Note 5.
Less than 12 months
12 months or longer
92,627
4,962
951
124,366
(2,142
1,236
125,602
38,554
(90
10,923
(139
49,477
17,787
(104
1,391
19,178
50,347
(885
2,666
(88
53,013
17,720
(227
379
(8
18,099
347,314
(6,353
16,595
(387
363,909
The following table contains an analysis of the Company’s fixed income securities with gross unrealized losses that are not deemed to have credit losses, categorized by the period that the securities were in a continuous loss position as of December 31, 2020. The fair value amounts reported in the table are estimates that are prepared using the process described in Note 5.
81,999
2,588
57,350
57,354
22,268
(389
13,354
(257
35,622
10,294
(526
1,154
(118
11,448
7,783
885
183,167
(3,022
14,512
(375
197,679
The Company regularly performs various analytical valuation procedures with respect to its investments, including reviewing each available for sale debt security in an unrealized loss position to assess whether the decline in fair value below amortized cost basis has resulted from a credit loss or other factors. In assessing whether a credit loss exists, the Company compares the present value of the cash flows expected to be collected from the security to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis of the security, a credit loss exists and an allowance for expected credit losses is recorded. Subsequent changes in the allowances are recorded in the period of change as either credit loss expense or reversal of credit loss expense. Any impairments related to factors other than credit losses and the intent to sell are recorded through other comprehensive income, net of taxes.
11
For fixed maturities, the factors considered in reaching the conclusion that a credit loss exists include, among others, whether:
the extent to which the fair value is less than the amortized cost basis;
(2)
the issuer is in financial distress;
(3)
the investment is secured;
(4)
a significant credit rating action occurred;
(5)
scheduled interest payments were delayed or missed;
(6)
changes in laws or regulations have affected an issuer or industry;
(7)
the investment has an unrealized loss and was identified by the Company’s investment manager as an investment to be sold before recovery or maturity;
(8)
the investment failed cash flow projection testing to determine if anticipated principal and interest payments will be realized; and
(9)
changes in US Treasury rates and/or credit spreads since original purchase to identify whether the unrealized loss is simply due to interest rate movement.
According to accounting guidance for debt securities in an unrealized loss position, the Company is required to assess whether it has the intent to sell the debt security or more likely than not will be required to sell the debt security before the anticipated recovery. If either of these conditions is met, any allowance for expected credit losses is written off and the amortized cost basis is written down to the fair value of the fixed maturity security with any incremental impairment reported in earnings. That new amortized cost basis shall not be adjusted for subsequent recoveries in fair value.
The Company elected the practical expedient to exclude accrued interest from both the fair value and the amortized cost basis of the available for sale debt securities for the purposes of identifying and measuring an impairment and to not measure an allowance for expected credit losses for accrued interest receivables. Accrued interest receivable is written off through net realized investment gains (losses) at the time the issuer of the bond defaults or is expected to default on payment. The Company made an accounting policy election to present the accrued interest receivable balance with other assets on the Company’s consolidated statements of financial position. Accrued interest receivable was $5.6 million and $5.7 million as of June 30, 2021 and December 31, 2020, respectively.
The following is a description, by asset type, of the methodology and significant inputs that the Company used to measure the amount of credit loss recognized in earnings, if any:
U.S. treasuries – As of June 30, 2021, gross unrealized losses related to U.S. treasuries were $2.840 million. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, macroeconomic and market analysis is conducted in evaluating these securities. Consideration is given to the interest rate environment, duration and yield curve management of the portfolio, sector allocation and security selection. Based on the analysis performed, the Company did not recognize a credit loss on U.S. treasuries during the period.
Agency obligations – As of June 30, 2021, gross unrealized losses related to agency obligations were $0.056 million. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, macroeconomic and market analysis is conducted in evaluating these securities. Consideration is given to the interest rate environment, duration and yield curve management of the portfolio, sector allocation and security selection. Based on the analysis performed, the Company did not recognize a credit loss on agency obligations during the period.
Obligations of states and political subdivisions – As of June 30, 2021, gross unrealized losses related to obligations of states and political subdivisions were $0.009 million. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, elements that may influence the performance of the municipal bond market are considered in evaluating these securities such as investor expectations, supply and demand patterns, and current versus historical yield and spread relationships. The analysis relies on the output of fixed income credit analysts, as well as dedicated municipal bond analysts who perform extensive in-house fundamental analysis on each issuer, regardless of their rating by the major agencies. Based on the analysis performed, the Company did not recognize a credit loss on obligations of states and political subdivisions during the period.
12
Mortgage-backed securities (“MBS”) – As of June 30, 2021, gross unrealized losses related to mortgage-backed securities were $2.151 million. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, mortgage-backed securities are modeled to project principal losses under downside, base, and upside scenarios for the economy and home prices. The primary assumption that drives the security and loan level modeling is the Home Price Index (“HPI”) projection. These forecasts incorporate not just national macro-economic trends, but also regional impacts to arrive at the most granular and accurate projections. These assumptions are incorporated into the model as a basis to generate delinquency probabilities, default curves, loss severity curves, and voluntary prepayment curves at the loan level within each deal. The model utilizes HPI-adjusted current loan to value, payment history, loan terms, loan modification history, and borrower characteristics as inputs to generate expected cash flows and principal loss for each bond under various scenarios. Based on the analysis performed, the Company did not recognize a credit loss on mortgage-backed securities during the period.
Asset backed securities (“ABS”) - As of June 30, 2021, gross unrealized losses related to asset backed securities were $0.229 million. The weighted average credit enhancement for the Company’s asset backed portfolio is 32.1. This represents the percentage of pool losses that can occur before an asset backed security will incur its first dollar of principal losses. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, every ABS transaction is analyzed on a stand-alone basis. This analysis involves a thorough review of the collateral, prepayment, and structural risk in each transaction. Additionally, the analysis includes an in-depth credit analysis of the originator and servicer of the collateral. The analysis projects an expected loss for a deal given a set of assumptions specific to the asset type. These assumptions are used to calculate at what level of losses the deal will incur its first dollar of principal loss. The major assumptions used to calculate this ratio are loss severities, recovery lags, and no advances on principal and interest. Based on the analysis performed, the Company did not recognize a credit loss on asset backed securities during the period.
Commercial mortgage-backed securities (“CMBS”) - As of June 30, 2021, gross unrealized losses related to the CMBS portfolio were $0.247 million. The weighted average credit enhancement for the Company’s CMBS portfolio is 34.5. This represents the percentage of pool losses that can occur before a commercial mortgage-backed security will incur its first dollar of principal loss. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, a loan level analysis is utilized where every underlying CMBS loan is re-underwritten based on a set of assumptions reflecting expectations for the future path of the economy. Each loan is analyzed over time using a series of tests to determine if a credit event will occur during the life of the loan. Inherent in this process are several economic scenarios and their corresponding rent/vacancy and capital market states. The five primary credit events that frame the analysis include loan modifications, term default, balloon default, extension, and ability to pay off at balloon. The resulting output is the expected loss adjusted cash flows for each bond under the base case and distressed scenarios. Based on the analysis performed, the Company did not recognize a credit loss on commercial mortgage-backed securities during the period.
Corporate bonds - As of June 30, 2021, gross unrealized losses related to corporate bonds were $0.973 million. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, analysis for this asset class includes maintaining detailed financial models that include a projection of each issuer’s future financial performance, including prospective debt servicing capabilities, capital structure composition, and the value of the collateral. The analysis incorporates the macroeconomic environment, industry conditions in which the issuer operates, the issuer’s current competitive position, its vulnerability to changes in the competitive and regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer creditworthiness, and asset protection. Part of the process also includes running downside scenarios to evaluate the expected likelihood of default as well as potential losses in the event of default. Based on the analysis performed, the Company did not recognize a credit loss on corporate bonds during the period.
Foreign bonds – As of June 30, 2021, gross unrealized losses related to foreign bonds were $0.235 million. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, detailed financial models are maintained that include a projection of each issuer’s future financial performance, including prospective debt servicing capabilities, capital structure composition, and the value of the collateral. The analysis incorporates the macroeconomic environment, industry conditions in which the issuer operates, the issuer’s current competitive position, its vulnerability to changes in the competitive and regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer creditworthiness, and asset protection. Part of the process also includes running downside scenarios to evaluate the expected likelihood of default as well as potential losses in the event of default. Based on the analysis performed, the Company did not recognize a credit loss on foreign bonds during the period.
13
The Company has evaluated its investment portfolio and has determined that an allowance for expected credit losses on its investments is not required.
Accumulated Other Comprehensive Income, Net of Tax
Accumulated other comprehensive income, net of tax, as of June 30, 2021 and December 31, 2020 was as follows:
Net unrealized gains (losses) from:
Fixed maturities
23,494
42,177
Foreign currency fluctuations
(41
161
Deferred taxes
(4,485
(8,030
The following tables present the changes in accumulated other comprehensive income, net of tax, by components, for the quarters and six months ended June 30, 2021 and 2020:
Quarter Ended June 30, 2021
(Dollars In Thousands)
Unrealized Gains and Losses on Available for Sale Securities
Foreign Currency Items
Accumulated Other Comprehensive Income
Beginning balance, net of tax
9,819
34
Other comprehensive income before reclassification, before tax
11,797
(84
11,713
Amounts reclassified from accumulated other comprehensive income, before tax
(453
Other comprehensive income, before tax
11,344
11,260
Income tax benefit
(2,162
17
(2,145
Ending balance, net of tax
19,001
(33
Quarter Ended June 30, 2020
14,895
(2,335
37,805
39,097
(12,820
24,985
26,277
Income tax expense
(1,144
38,736
(1,043
Six Months Ended June 30, 2021
34,181
127
(19,389
(202
(19,591
706
(18,683
(18,885
Income tax (expense) benefit
3,503
42
3,545
14
Six Months Ended June 30, 2020
18,641
(1,032
Other comprehensive income (loss) before reclassification, before tax
36,921
36,910
(14,752
Other comprehensive income (loss), before tax
22,169
22,158
(2,074
The reclassifications out of accumulated other comprehensive income for the quarters and six months ended June 30, 2021 and 2020 were as follows:
Amounts Reclassified from
Accumulated Other
Comprehensive Income
Details about Accumulated Other
Comprehensive Income Components
Affected Line Item in the Consolidated
Statements of Operations
Unrealized gains and losses on available for sale securities
Other net realized investment (gains) losses
158
3,432
Total reclassifications, net of tax
(185
3,651
15
Net Realized Investment Gains (Losses)
The components of net realized investment gains (losses) for the quarters and six months ended June 30, 2021 and 2020 were as follows:
Gross realized gains
2,300
16,738
5,678
18,980
Gross realized losses
(1,847
(3,918
(6,384
(4,228
Net realized gains (losses)
453
12,820
(706
14,752
Equity securities:
4,338
29,402
8,784
11,507
(943
(1,508
(1,021
(33,595
3,395
27,894
7,763
(22,088
Derivatives:
1,366
7,625
3,719
19,401
(1,381
(9,832
(3,124
(41,720
Net realized gains (losses) (1)
(15
(2,207
595
(22,319
Total net realized investment gains (losses)
Includes periodic net interest settlements related to the derivatives of $1.4 million and $1.1 million for the quarters ended June 30, 2021 and 2020, respectively, and $2.8 million and $1.7 million for the six months ended June 30, 2021 and 2020, respectively.
The following table shows the calculation of the portion of realized gains and losses related to equity securities held as of June 30, 2021 and 2020:
Net gains (losses) recognized during the period on equity securities
Less: net gains (losses) recognized during the period on equity securities sold during the period
1,429
436
2,805
(3,785
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date
1,966
27,458
4,958
(18,303
The proceeds from sales and redemptions of available for sale and equity securities resulting in net realized investment gains (losses) for the six months ended June 30, 2021 and 2020 were as follows:
Equity securities
16
Net Investment Income
The sources of net investment income for the quarters and six months ended June 30, 2021 and 2020 were as follows:
6,648
8,551
13,475
17,592
618
1,407
1,293
2,771
214
52
264
232
3,788
(12,022
6,785
(11,489
Total investment income
11,268
(2,012
21,817
9,106
Investment expense
(635
(347
(1,348
(1,336
Net investment income
The Company’s total investment return on a pre-tax basis for the quarters and six months ended June 30, 2021 and 2020 were as follows:
Net realized and unrealized investment returns
15,093
64,784
(11,233
(7,497
Total investment return
25,726
62,425
9,236
273
Total investment return % (1)
1.8
%
3.9
0.6
0.0
Average investment portfolio (2)
1,452,754
1,591,987
1,463,027
1,620,186
Not annualized.
Average of total cash and invested assets, net of receivable/payable for securities purchased and sold, as of the beginning and end of the period.
As of June 30, 2021 and December 31, 2020, the Company did not own any fixed maturity securities that were non-income producing for the preceding twelve months.
Insurance Enhanced Asset-Backed and Credit Securities
As of June 30, 2021, the Company held insurance enhanced bonds with a market value of approximately $30.3 million which represented 2.0% of the Company’s total cash and invested assets, net of payable/ receivable for securities purchased and sold.
The insurance enhanced bonds are comprised of $15.3 million of municipal bonds, $7.2 million of commercial mortgage-backed securities, and $7.8 million of collateralized mortgage obligations. The financial guarantors of the Company’s $30.3 million of insurance enhanced commercial-mortgage-backed, municipal securities, and collateralized mortgage obligations include Municipal Bond Insurance Association ($2.8 million), Assured Guaranty Corporation ($9.6 million), Federal Home Loan Mortgage Corporation ($15.0 million), Federal National Mortgage Association ($0.3 million), Ambac Financial Group ($1.9 million), School Bond Guaranty Program ($0.2 million), and Higher Education State Aid Intercept Program ($0.5 million).
The Company had no direct investments in the entities that have provided financial guarantees or other credit support to any security held by the Company at June 30, 2021.
Bonds Held on Deposit
Certain cash balances, cash equivalents, and bonds available for sale were deposited with various governmental authorities in accordance with statutory requirements, were held as collateral, or were held in trust. The fair values were as follows as of June 30, 2021 and December 31, 2020:
Estimated Fair Value
On deposit with governmental authorities
26,762
26,966
Held in trust pursuant to third party requirements
81,033
100,234
Letter of credit held for third party requirements
2,512
3,970
Securities held as collateral
494
110,307
131,664
Variable Interest Entities
A Variable Interest Entity (“VIE”) refers to an investment in which an investor holds a controlling interest that is not based on the majority of voting rights. Under the VIE model, the party that has the power to exercise significant management influence and maintain a controlling financial interest in the entity’s economics is said to be the primary beneficiary, and is required to consolidate the entity within their results. Other entities that participate in a VIE, for which their financial interests fluctuate with changes in the fair value of the investment entity’s net assets but do not have significant management influence and the ability to direct the VIE’s significant economic activities are said to have a variable interest in the VIE but do not consolidate the VIE in their financial results.
The Company has variable interests in four VIE’s for which it is not the primary beneficiary. These investments are accounted for under the equity method of accounting as their ownership interest exceeds 3% of their respective investments.
The carrying value of one of the Company’s VIE’s, which invests in distressed securities and assets, was $9.9 million and $10.8 million as of June 30, 2021 and December 31, 2020, respectively. The Company’s maximum exposure to loss from this VIE, which factors in future funding commitments, was $24.1 million and $25.0 million at June 30, 2021 and December 31, 2020, respectively. The carrying value of a second VIE that also invests in distressed securities and assets was $13.7 million and $15.7 million at June 30, 2021 and December 31, 2020, respectively. The Company’s maximum exposure to loss from this VIE, which factors in future funding commitments, was $30.7 million and $32.7 million at June 30, 2021 and December 31, 2020, respectively. The carrying value and maximum exposure to loss of a third VIE that invests in Real Estate Investment Trust (“REIT”) qualifying assets was $11.6 million and $10.5 million as of June 30, 2021 and December 31, 2020, respectively. The carrying value and maximum exposure to loss of a fourth VIE, which invests in a broad portfolio of non-investment grade loans, was $105.7 million and $60.0 million as of June 30, 2021 and December 31, 2020, respectively. The Company’s investment in VIEs is included in other invested assets on the consolidated balance sheet with changes in carrying value recorded in the consolidated statements of operations.
4.Derivative Instruments
Derivatives are used by the Company to reduce risks from changes in interest rates and limit exposure to severe equity market changes. The Company has interest rate swaps with terms to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts as calculated by reference to an agreed notional amount. The Company also utilizes exchange-traded futures contracts, which give the holder the right and obligation to participate in market movements at a future date, to allow the Company to react faster to market conditions. The Company posts collateral and settles variation margin in cash on a daily basis equal to the amount of the futures contracts’ change in value scaled by a multiplier.
18
The Company accounts for the interest rate swaps and futures as non-hedge instruments and recognizes the fair value of the interest rate swaps in other assets or other liabilities on the consolidated balance sheets with the changes in fair value recognized as net realized investment gains or losses in the consolidated statements of operations. The Company is ultimately responsible for the valuation of the interest rate swaps. To aid in determining the estimated fair value of the interest rate swaps, the Company relies on the forward interest rate curve and information obtained from a third party financial institution.
The following table summarizes information on the location and the gross amount of the derivatives on the consolidated balance sheets as of June 30, 2021 and December 31, 2020:
Derivatives Not Designated as
Hedging Instruments under ASC 815
Balance Sheet Location
Notional Amount
Interest rate swap agreements
Other assets/liabilities
213,022
(12,712
(16,430
Futures contracts on bonds (1)
28,996
Total (2)
242,018
Futures are settled daily such that their fair value is not reflected in the consolidated statements of financial position
The derivatives are held by GBLI Holdings, LLC and are guaranteed by Global Indemnity Group, LLC
The following table summarizes the net gains (losses) included in the consolidated statements of operations for changes in the fair value of the derivatives and the periodic net interest settlements under the derivatives for the quarters and six months ended June 30, 2021 and 2020:
Consolidated Statements of Operations Line
(1,449
914
(10,872
Futures contracts on bonds
(59
(319
(2,458
Futures contracts on equities
(699
(8,989
As of June 30, 2021 and December 31, 2020, the Company is due $2.4 million and $2.8 million, respectively, for funds it needed to post to execute the swap transaction and $15.0 million and $17.5 million, respectively, for margin calls made in connection with the interest rate swaps. These amounts are included in other assets on the consolidated balance sheets.
As of June 30, 2021, the Company was not utilizing futures contracts. As of December 31, 2020, the Company posted initial margin of $0.5 million in securities for trading futures contracts with a mark-to-market receivable of less than $0.1 million. Variation margin is included in other assets on the consolidated balance sheets.
5.
Fair Value Measurements
The accounting standards related to fair value measurements define fair value, establish a framework for measuring fair value, outline a fair value hierarchy based on inputs used to measure fair value, and enhance disclosure requirements for fair value measurements. These standards do not change existing guidance as to whether or not an instrument is carried at fair value. The Company has determined that its fair value measurements are in accordance with the requirements of these accounting standards.
19
The Company’s invested assets and derivative instruments are carried at their fair value and are categorized based upon a fair value hierarchy:
•
Level 1 – inputs utilize quoted prices (unadjusted) in active markets for identical assets that the Company has the ability to access at the measurement date.
Level 2 – inputs utilize other than quoted prices included in Level 1 that are observable for similar assets, either directly or indirectly.
Level 3 – inputs are unobservable for the asset, and include situations where there is little, if any, market activity for the asset.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset.
The following table presents information about the Company’s invested assets and derivative instruments measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.
Level 1
Level 2
Level 3
Assets:
131,784
831
276,036
404
1,025,813
1,235
Total assets measured at fair value
215,310
1,048,221
1,264,766
Derivative instruments
12,712
Total liabilities measured at fair value
20
993,706
87,307
284,787
1,005,389
1,290,176
16,430
The securities classified as Level 1 in the above table consist of U.S. treasuries and equity securities actively traded on an exchange.
The securities classified as Level 2 in the above table consist primarily of fixed maturity securities and derivative instruments. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, security prices are derived through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information. If there are no recent reported trades, matrix or model processes are used to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Included in the pricing of asset-backed securities, collateralized mortgage obligations, and mortgage-backed securities are estimates of the rate of future prepayments of principal over the remaining life of the securities. Such estimates are derived based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral. The estimated fair value of the derivative instruments, consisting of interest rate swaps, is obtained from a third party financial institution that utilizes observable inputs such as the forward interest rate curve.
The investments classified as Level 3 in the above table consist of fixed maturities with unobservable inputs. The Company does not have access to daily valuations; therefore, market trades, performance of the underlying assets, and key risks are considered in order to estimate fair values of these debt instruments.
The following table presents changes in Level 3 investments measured at fair value on a recurring basis for the quarters and six months ended June 30, 2021 and 2020:
For the Six Months Ended
Beginning balance
2,203
Total gains (realized / unrealized):
Included in accumulated other comprehensive income
-32
Transfers into level 3
702
Transfers out of level 3
(1,720
Purchases
2,285
Sales
Ending balance
21
For the Company’s material debt arrangements, the current fair value of the Company’s debt at June 30, 2021 and December 31, 2020 was as follows:
Carrying Value
7.875% Subordinated Notes due 2047 (1)
133,587
132,008
As of June 30, 2021 and December 31, 2020, the carrying value and fair value of the 7.875% Subordinated Notes due 2047 are net of unamortized debt issuance cost of $3.6 million and $3.7 million, respectively.
The subordinated notes due 2047 are publicly traded instruments and are classified as Level 1 in the fair value hierarchy.
Fair Value of Alternative Investments
Other invested assets consist of limited liability companies and limited partnerships whose carrying value approximates fair value. The following table provides the fair value and future funding commitments related to these investments at June 30, 2021 and December 31, 2020.
Future Funding
Commitment
European Non-Performing Loan Fund, LP (1)
9,930
14,214
10,808
Distressed Debt Fund, LP (2)
13,748
17,000
15,721
Mortgage Debt Fund, LP (3)
11,615
10,489
Credit Fund, LLC (4)
105,710
60,000
Global Debt Fund, LP (5)
25,000
31,214
This limited partnership invests in distressed securities and assets through senior and subordinated, secured and unsecured debt and equity, in both public and private large-cap and middle-market companies. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets.
This limited partnership invests in stressed and distressed securities and structured products. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets.
This limited partnership invests in REIT qualifying assets such as mortgage loans, investor property loans, and commercial mortgage loans. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets.
This limited liability company invests in a broad portfolio of non-investment grade loans, secured and unsecured corporate debt, credit default swaps, reverse repurchase agreements and synthetic indices. The Company does have the ability to sell its interest by providing notice to the fund.
This limited partnership invests in performing, stressed or distressed securities and loans across the global fixed income markets. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets.
Limited Liability Companies and Limited Partnerships with ownership interest exceeding 3%
The Company uses the equity method to account for investments in limited liability companies and limited partnerships where its ownership interest exceeds 3%. The equity method of accounting for an investment in limited liability companies and limited partnerships requires that its cost basis be updated to account for the income or loss earned on the investment. In the Fair Value of Alternative Investments table above, all of the investments, except for the Credit Fund, LLC, are booked on a one quarter lag due to non-availability of data at the time the financial statements are prepared. Information for the Credit Fund, LLC is received on a timely basis and is included in current results. The investment income associated with these limited liability companies and limited partnerships is reflected in the consolidated statements of operations in the amounts of $3.8 million and ($12.0) million for the quarters ended June 30, 2021 and 2020, respectively, and $6.8 million and ($11.5) million for the six months ended June 30, 2021 and 2020, respectively.
22
Pricing
The Company’s pricing vendors provide prices for all investment categories except for investments in limited liability companies and limited partnerships. Two primary vendors are utilized to provide prices for equity and fixed maturity securities.
The following is a description of the valuation methodologies used by the Company’s pricing vendors for investment securities carried at fair value:
Equity security prices are received from primary and secondary exchanges.
Corporate and agency bonds are evaluated by utilizing a spread to a benchmark curve. Bonds with similar characteristics are grouped into specific sectors. Inputs for both asset classes consist of trade prices, broker quotes, the new issue market, and prices on comparable securities.
Data from commercial vendors is aggregated with market information, then converted into an option adjusted spread (“OAS”) matrix and prepayment model used for collateralized mortgage obligations (“CMO”). CMOs are categorized with mortgage-backed securities in the tables listed above. For asset-backed securities, spread data is derived from trade prices, dealer quotations, and research reports. For both asset classes, evaluations utilize standard inputs plus new issue data, and collateral performance. The evaluated pricing models incorporate cash flows, broker quotes, market trades, historical prepayment speeds, and dealer projected speeds.
For obligations of state and political subdivisions, an attribute-based modeling system is used. The pricing model incorporates trades, market clearing yields, market color, and fundamental credit research.
U.S. treasuries are evaluated by obtaining feeds from a number of live data sources including primary and secondary dealers as well as inter-dealer brokers.
For mortgage-backed securities, various external analytical products are utilized and purchased from commercial vendors.
The Company performs certain procedures to validate whether the pricing information received from the pricing vendors is reasonable, to ensure that the fair value determination is consistent with accounting guidance, and to ensure that its assets are properly classified in the fair value hierarchy. The Company’s procedures include, but are not limited to:
Reviewing periodic reports provided by the Investment Manager that provides information regarding rating changes and securities placed on watch. This procedure allows the Company to understand why a particular security’s market value may have changed or may potentially change.
Understanding and periodically evaluating the various pricing methods and procedures used by the Company’s pricing vendors to ensure that investments are properly classified within the fair value hierarchy.
On a quarterly basis, the Company corroborates investment security prices received from its pricing vendors by obtaining pricing from a second pricing vendor for a sample of securities.
During the quarters and six months ended June 30, 2021 and 2020, the Company has not adjusted quotes or prices obtained from the pricing vendors.
6.Allowance for Expected Credit Losses - Premium Receivables and Reinsurance Receivables
For premium receivables, the allowance is based upon the Company’s ongoing review of key aspects of amounts outstanding, including but not limited to, length of collection periods, direct placement with collection agencies, solvency of insured or agent, terminated agents, and other relevant factors.
23
The following table is an analysis of the allowance for expected credit losses related to the Company's premium receivables for the quarters and six months ended June 30, 2021 and 2020:
2,772
2,746
2,900
2,754
Current period provision for expected credit losses
172
313
260
475
Write-offs
(122
(128
(338
(298
2,822
2,931
For reinsurance receivables, the allowance is based upon the Company’s ongoing review of key aspects of amounts outstanding, including but not limited to, length of collection periods, disputes, applicable coverage defenses, insolvent reinsurers, financial strength of solvent reinsurers based on AM Best Ratings and other relevant factors.
The following table is an analysis of the allowance for expected credit losses related to the Company's reinsurance receivables for the quarters and six months ended June 30, 2021 and 2020:
8,992
7.Income Taxes
Effective August 28, 2020, Global Indemnity Group, LLC became a publicly traded partnership for U.S. federal income tax purposes and meets the qualifying income exception to maintain partnership status. As a publicly traded partnership, Global Indemnity Group, LLC is generally not subject to federal income tax and most state income taxes. However, income earned by the subsidiaries of Global Indemnity Group, LLC is subject to corporate tax in the United States and certain foreign jurisdictions.
As of
24
June 30, 2021, the statutory income tax rates of the countries where the Company conducts or conducted business are 21% in the United States, 0% in Bermuda, 19% in the United Kingdom, and 25% on non-trading income, 33% on capital gains and 12.5% on trading income in the Republic of Ireland. The statutory income tax rate of each country is applied against the expected annual taxable income of the Company in each country to estimate the annual income tax expense.
The Company’s income (loss) before income taxes from its non-U.S. subsidiaries and U.S. subsidiaries for the quarters and six months ended June 30, 2021 and 2020 were as follows:
Non-U.S.
Subsidiaries
U.S.
Eliminations
Net realized investment gains
Income before income taxes
16,052
148,497
131,212
19,546
122,301
6,906
(5,777
(3,488
(1,668
40,175
302
464
25,086
157,163
(207
67,504
5,695
47,883
4,947
3,671
334
7,866
14,317
30,239
25
33,569
286,704
252,807
43,401
242,914
13,282
1,473
(6,985
Net realized investment losses
(5,378
(24,277
Other income (loss)
(16
947
51,289
221,057
12,355
132,589
14,244
95,746
6,074
6,767
676
15,886
17,940
(29,931
The following table summarizes the components of income tax expense (benefit):
Deferred income tax expense (benefit):
U.S. Federal
Total deferred income tax expense (benefit)
Total income tax expense (benefit)
The weighted average expected tax provision has been calculated using income (loss) before income taxes in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate.
26
The following table summarizes the differences between the tax provision for financial statement purposes and the expected tax provision at the weighted average tax rate:
Amount
% of Pre-
Tax Income
Expected tax provision at weighted average tax rate
1,516
21.0
6,348
14.2
Adjustments:
Dividend exclusion
(19
(0.3
(0.1
Non-deductible interest
678
1.6
Parent income treated as partnership for tax
(819
(11.3
Other
166
2.3
Effective income tax expense
11.7
15.7
The effective income tax expense rate for the quarter ended June 30, 2021 decreased to 11.7%, compared to 15.7% for the quarter ended June 30, 2020. Although the percentage of U.S. income before taxes to consolidated income before taxes increased from 67.9% in 2020 to 100.0% in 2021, 54.0% of the U.S. income before taxes for quarter ended June 30, 2021 relates to Global Indemnity Group, LLC for which its income passes through to its shareholders. Global Indemnity Group, LLC has elected to be a partnership for purposes of U.S. tax.
2,632
(6,287
52.4
Tax exempt interest
(1
(36
(112
0.9
1,357
(2,186
(17.4
231
79
(0.6
Effective income tax expense (benefit)
5.1
41.4
The effective income tax expense rate for the six months ended June 30, 2021 was 5.1%, compared with an effective income tax benefit rate of 41.4% for the six months ended June 30, 2020. The effective income tax expense rate of 5.1% for the six months ended June 30, 2021 results from 83.1% of income before taxes is from Global Indemnity Group, LLC which has elected to be a partnership for purposes of U.S. tax for which its income passes through to its shareholders. The effective income tax benefit rate of 41.4% for the six months ended June 30, 2020 resulted from investment losses incurred by the Company’s U.S. subsidiaries primarily resulting from the impact of changes in fair value on equity securities and derivatives due to disruption in the global financial markets as a result of COVID-19.
The Company has a net operating loss (“NOL”) carryforward of $28.3 million as of June 30, 2021, which begins to expire in 2036 based on when the original NOL was generated. The Company’s NOL carryforward as of December 31, 2020 was $26.2 million.
The Company has a Section 163(j) (“163(j)”) carryforward of $4.2 million and $5.6 million as of June 30, 2021 and December 31, 2020, respectively, which can be carried forward indefinitely. The 163(j) carryforward relates to the limitation on the deduction for business interest expense paid or accrued.
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8.Liability for Unpaid Losses and Loss Adjustment Expenses
Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows:
675,908
639,468
630,181
Less: Ceded reinsurance receivables
79,421
78,753
82,158
76,273
Net balance at beginning of period
596,487
560,715
580,653
553,908
Incurred losses and loss adjustment expenses related to:
Current year
85,409
86,603
179,603
164,850
Prior years
5,529
(19,306
2,118
(19,906
Total incurred losses and loss adjustment expenses
Paid losses and loss adjustment expenses related to:
38,558
37,393
60,277
59,427
38,400
26,767
91,630
75,573
Total paid losses and loss adjustment expenses
76,958
64,160
151,907
135,000
Net balance at end of period
610,467
563,852
Plus: Ceded reinsurance receivables
87,151
87,221
651,073
When analyzing loss reserves and prior year development, the Company considers many factors, including the frequency and severity of claims, loss trends, case reserve settlements that may have resulted in significant development, and any other additional or pertinent factors that may impact reserve estimates.
During the second quarter of 2021, the Company increased its prior accident year loss reserves by $5.5 million, which consisted of a $5.9 million increase related to Commercial Specialty, a $0.1 million decrease related to Farm, Ranch & Stable, and a $0.3 million decrease related to Reinsurance Operations.
The $5.9 million increase of prior accident year loss reserves related to Commercial Specialty primarily consisted of the following:
Property: A $6.9 million increase primarily recognizes higher than expected claims severity mainly in the 2016, 2018 and 2019 accident years partially offset by a decrease in the 2020 accident year. The majority of the increase was in the 2018 accident year which reflects an increase in the estimated ultimate for Hurricane Michael due to recognizing case incurred emergence on a Property Brokerage claim.
General Liability: A $0.7 million decrease reflects a reduction of $0.9 million in the 2000 accident year from a runoff reserve category as well as other decreases mainly resulting from lower than anticipated claims severity in the 2007, 2008, 2013, 2014 and 2019 accident years partially offset by increases in the 2012, 2016 through 2018 and 2020 accident years.
Professional: A $0.3 million decrease primarily in the 2019 and 2020 accident years mainly reflecting lower than anticipated claims severity.
The $0.1 million reduction of prior accident year loss reserves related to Farm, Ranch & Stable primarily consisted of the following:
General Liability: A $0.1 million reduction primarily reflects a reduction in the 2017 accident year, mostly offset by an increase in the 2018 accident year.
The $0.3 million decrease in prior accident year loss reserves related to Reinsurance Operations were based on a review of the experience reported from cedants. There was a $0.3 million decrease in the property lines mainly in the 2017 through 2020 accident years.
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During the second quarter of 2020, the Company reduced its prior accident year loss reserves by $19.3 million which consisted of a $14.2 million decrease related to Commercial Specialty, a $4.6 million decrease related to Specialty Property, a $0.8 million decrease related to Farm, Ranch & Stable, and a $0.3 million increase related to Reinsurance Operations.
The $14.2 million reduction of prior accident year loss reserves related to Commercial Specialty primarily consisted of the following:
General Liability: A $18.3 million reduction in aggregate with $4.7 million of favorable development in the construction defect reserve category and $13.6 million of favorable development in the other general liability reserve categories. The reduction in the construction defect reserve category primarily recognizes lower than expected claims frequency and severity in the 2005 through 2009, 2015 and 2017 accident years, slightly offset by an increase in the 2016 accident year. For the other general liability reserve categories, lower than anticipated claims severity was the main driver of the favorable development primarily in the 2005 through 2017 accident years, partially offset by an increase in the 2019 accident year.
Commercial Auto Liability: A $1.0 million reduction in the 2010 through 2016 accident years recognizes lower than anticipated claims severity.
Property: An increase of $5.8 million primarily recognizes higher than expected claims severity mainly in the 2017 through 2019 accident years, partially offset by a decrease in the 2016 accident year. The bulk of the increase was in the 2018 accident year which reflects a higher estimated ultimate for Hurricane Michael. The increase in ultimate resulted from receiving additional information in the quarter for a Property Brokerage claim.
Professional: A $0.7 million decrease primarily in the 2009 and 2010 accident years reflects lower than expected claims severity.
The $4.6 million decrease of prior accident year loss reserves related to Specialty Property primarily consisted of the following:
General Liability: A $1.4 million decrease primarily recognizes lower than expected claims severity mainly in the 2015 through 2018 accident years.
Property: A $3.2 million decrease mainly reflects lower than anticipated claims severity in the 2015 through 2018 accident years, partially offset by an increase in the 2019 accident year due to higher than expected claims severity.
The $0.8 million reduction of prior accident year loss reserves related to Farm, Ranch & Stable primarily consisted of the following:
Property: A $0.7 million decrease mainly reflects lower than anticipated claims severity in the 2016 through 2019 accident years.
General Liability: A $0.1 million decrease primarily recognizes lower than expected claims severity mainly in the 2015 through 2017 and 2019 accident years, partially offset by an increase in the 2013 accident year due to higher than anticipated claims severity.
The $0.3 million increase in prior accident year loss reserves related to Reinsurance Operations was from the property lines. Based on a review of the experience reported from cedants, increases were in the 2011 and 2019 accident years, partially offset by decreases in the 2012 through 2018 accident years.
During the first six months of 2021, the Company increased its prior accident year loss reserves by $2.1 million, which consisted of a $5.6 million increase related to Commercial Specialty, a $1.6 million decrease related to Specialty Property, a $0.9 million decrease related to Farm, Ranch & Stable, and a $1.0 million decrease related to Reinsurance Operations.
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The $5.6 million increase in prior accident year loss reserves related to Commercial Specialty primarily consisted of the following:
General Liability: A $0.8 million reduction reflects a decrease of $0.9 million in the 2000 accident year from a runoff reserve category as well as other decreases mainly resulting from lower than anticipated claims severity in the 2007, 2008, 2011 and 2013 through 2016 accident years partially offset by increases in the 2012, 2017 and 2018 accident years.
Property: An increase of $6.8 million primarily recognizes higher than expected claims severity mainly in the 2016 and 2018 accident years partially offset by decreases in the 2017, 2019 and 2020 accident years. The majority of the increase was in the 2018 accident year which reflects an increase in the estimated ultimate for Hurricane Michael due to recognizing case incurred emergence on a Property Brokerage claim.
Professional: A $0.4 million decrease primarily in the 2019 and 2020 accident years mainly reflecting lower than anticipated claims severity.
The $1.6 million decrease in prior accident year loss reserves related to Specialty Property primarily consisted of the following:
General Liability: A $1.2 million reduction mostly in the 2018 accident year primarily reflects lower than anticipated claims severity.
Property: A $0.4 million decrease mostly in the non-catastrophe reserve segments. The reductions were primarily in the 2016 through 2019 accident years mainly due to lower than expected claims severity partially offset by an increase in the 2020 accident year driven by higher than anticipated claims severity.
The $0.9 million decrease in prior accident year loss reserves related to Farm, Ranch & Stable primarily consisted of the following:
Property: A $0.8 million decrease in total reflects subrogation recoveries of $1.1 million in the catastrophe reserve category from the California Thomas wildfire loss in the 2017 accident year and a decrease of $0.5 million in the 2019 accident year primarily recognizing lower than expected claims severity. These decreases were partially offset by increases in the 2018 and 2020 accident years mainly due to higher than anticipated claims severity.
General Liability: A $0.1 million reduction primarily reflects decreases in the 2015 and 2017 accident years, mostly offset by increases in the 2007 and 2018 accident years.
The $1.0 million reduction of prior accident year loss reserves related to Reinsurance Operations was from the property lines. Based on a review of the experience reported from cedants, decreases were recognized primarily in the 2011, 2017 and 2018 accident years partially offset by increases in the 2010 and 2019 accident years. In total, property catastrophe decreased $2.7 million and property non-catastrophe increased $1.7 million.
During the first six months of 2020, the Company reduced its prior accident year loss reserves by $19.9 million, which consisted of a $14.2 million decrease related to Commercial Specialty, a $4.6 million decrease related to Specialty Property, a $0.8 million decrease related to Farm, Ranch & Stable, and a $0.3 million decrease related to Reinsurance Operations.
The $14.2 million decrease in prior accident year loss reserves related to Commercial Specialty primarily consisted of the following:
General Liability: An $18.0 million reduction in aggregate with $4.7 million of favorable development in the construction defect reserve category and $13.3 million of favorable development in the other general liability reserve categories. The reduction in the construction defect reserve category primarily recognizes lower than expected claims frequency and severity in the 2005 through 2009, 2015 and 2017 accident years, slightly offset by an increase in the 2016 accident year. For the other general liability reserve categories, lower than anticipated claims severity was the main driver of the favorable development primarily in the 2005 through 2015 accident years, partially offset by an increase in the 2016 through 2019 accident years.
30
Workers Compensation: A $0.2 million decrease primarily in loss adjustment expense reserves in the 2012 accident year and accident years prior to 2004.
Property: An increase of $5.8 million primarily recognizes higher than expected claims severity mainly in the 2017 through 2019 accident years. The bulk of the increase was in the 2018 accident year which reflects a higher estimated ultimate for Hurricane Michael. The increase in ultimate resulted from receiving additional information in the quarter for a Property Brokerage claim.
Professional: A $0.7 million decrease mainly in the 2009, 2010 and 2019 accident years reflects lower than expected claims severity, partially offset by an increase in the 2006 accident year.
The $4.6 million decrease in prior accident year loss reserves related to Specialty Property primarily consisted of the following:
General Liability: A $1.8 million decrease primarily recognizes lower than expected claims severity mainly in the 2015 through 2019 accident years.
Property: A $2.8 million decrease mainly reflects lower than anticipated claims severity in the 2015 through 2018 accident years, partially offset by an increase in the 2019 accident year due to higher than expected claims severity.
The $0.8 million decrease in prior accident year loss reserves related to Farm, Ranch & Stable primarily consisted of the following:
General Liability: A $0.1 million decrease primarily recognizes lower than expected claims severity mainly in the 2015 through 2017 accident years, partially offset by an increase in the 2013 accident year due to higher than anticipated claims severity.
The $0.3 million reduction of prior accident year loss reserves related to Reinsurance Operations was from the property lines. Based on a review of the experience reported from cedants, decreases were in the 2012 through 2017 accident years, partially offset by increases in the 2011, 2018 and 2019 accident years.
9.
Leases
The Company determines if an arrangement is a lease at inception. Leases with a term of 12 months or less are not recorded on the consolidated balance sheets. For leases with a term of greater than 12 months, lease right-of-use assets (“ROU”) and lease liabilities are included on the consolidated balance sheets.
Lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The Company’s leases do not provide an implicit rate; therefore, the Company uses its incremental borrowing rate at the commencement date in determining the present value of future payments. The ROU assets are calculated using the initial lease liability amount, plus any lease payments made at or before the commencement date, minus any lease incentives received, plus any initial direct costs incurred.
The Company’s lease agreements may contain both lease and non-lease components which are accounted separately. The Company elected the practical expedient on not separating lease components from non-lease components for its equipment leases.
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The Company leases office space and equipment under various operating lease arrangements. The Company’s leases have remaining lease terms ranging from 4 months to 9 years. Some building leases have options to extend, terminate, or retract the leased area. In June, 2021, the Company exercised the contraction clause of one of its leases. The Company incurred a $0.4 million contraction fee in conjunction with exercising the contraction clause. The related ROU asset and lease liability were revalued at June 30, 2021. The Company did not factor in any other term extension, terminations, or space retractions into the lease terms used to calculate the right-of-use assets and lease liabilities since it was uncertain as to whether these options would be executed.
Lease expenses for minimum lease payments are recognized on a straight-line basis over the lease term.
The components of lease expenses were as follows:
Operating lease expenses
814
731
1,451
1,479
Short-term lease expenses
Total lease expenses
816
733
1,456
1,483
There was no sublease income for the quarters and six months ended June 30, 2021 and 2020.
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of liabilities:
Operating leases
711
Right-of-use assets obtained in exchange for new lease obligations:
244
91
Supplemental balance sheet information related to leases was as follows:
The table below presents the lease-related assets and liabilities recorded on the consolidated balance sheets.
Classification on the consolidated balance sheets
Operating lease assets
Operating lease liabilities
Weighted-average remaining lease term:
8.3 years
8.8 years
Weighted-average discount rate:
Operating leases (1)
1.5
2.6
Represents the Company’s incremental borrowing rate
32
At June 30, 2021, future minimum lease payments under non-cancelable operating leases were as follows:
2021 (1)
1,689
2022
2,621
2023
2,652
2024
2,613
2025
2,643
Thereafter
10,716
Total future minimum lease payments
22,934
Less: amount representing interest
1,368
Present value of minimum lease payments
(1)Excludes the six months ended June 30, 2021
10.Shareholders’ Equity
There were 7,100 A ordinary shares that were surrendered or repurchased during the quarter ended June 30, 2021 with an average price paid per share of $27.64. There were no class A common shares that were surrendered or repurchased during the quarters ended June 30, 2020.
The following table provides information with respect to the class A common shares that were surrendered or repurchased during the six months ended June 30, 2021:
Period (1)
Total Number
of Shares
Purchased
Average
Price Paid
Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plan or Program
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
January 1-31, 2021
6,720
28.59
March 1-31, 2021
3,095
29.40
June 1-30, 2021
27.64
28.34
Based on settlement date.
Surrendered by employees as payment of taxes withheld on the vesting of restricted stock and/or restricted stock units.
The following table provides information with respect to the class A common shares that were surrendered or repurchased during the six months ended June 30, 2020:
January 1-31, 2020
3,124
29.63
February 1-29, 2020
1,600
31.13
30.14
On April 5, 2021, Global Indemnity Group, LLC converted 186,160 of class B common shares to class A common shares. There were no other class B common shares that were surrendered or repurchased during the quarters and six months ended June 30, 2021 or 2020.
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As of June 30, 2021, Global Indemnity Group, LLC’s class A common shares were held by approximately 180 shareholders of record. There were four holders of record of Global Indemnity Group, LLC’s class B common shares, all of whom are affiliated investment funds of Fox Paine & Company, LLC, as of June 30, 2021. Global Indemnity Group, LLC’s preferred shares were held by 1 holder of record, an affiliate of Fox Paine & Company, LLC, as of June 30, 2021.
Please see Note 14 of the notes to the consolidated financial statements in Item 8 Part II of the Company’s 2020 Annual Report on Form 10-K for more information on the Company’s repurchase program.
Dividends / Distributions
Distribution payments of $0.25 per common share were declared during the six months ended June 30, 2021 as follows:
Approval Date
Record Date
Payment Date
Total Distributions Declared
February 14, 2021
March 22, 2021
March 31, 2021
3,570
June 5, 2021
June 21, 2021
3,579
Various (1)
Various
216
7,365
Represents distributions declared on unvested shares, net of forfeitures.
Dividend payments of $0.25 per common share were declared during the six months ended June 30, 2020 as follows:
Total Dividends Declared
February 9, 2020
March 24, 2020
March 31, 2020
3,539
June 7, 2020
June 23, 2020
June 30, 2020
215
7,299
Represents dividends declared on unvested shares, net of forfeitures.
As of June 30, 2021 and December 31, 2020, accrued distributions on unvested shares, which were included in other liabilities on the consolidated balance sheets, were $0.9 million and $0.7 million, respectively. Accrued preferred distributions were less than $0.1 million as of both June 30, 2021 and December 31, 2020 and were included in other liabilities on the consolidated balance sheets.
Please see Note 14 of the notes to the consolidated financial statements in Item 8 Part II of the Company’s 2020 Annual Report on Form 10-K for more information on the Company’s dividend program.
11.
Related Party Transactions
Fox Paine Entities
Pursuant to Global Indemnity Group, LLC’s Limited Liability Company Agreement (“LLCA”), Fox Paine Capital Fund II International, L.P. and certain of its affiliates (the “Fox Paine Funds”), together with Fox Mercury Investments, L.P. and certain of its affiliates (the “FM Entities”), and Fox Paine & Company LLC (collectively, the “Fox Paine Entities”) currently constitute a Class B Majority Shareholder (as defined in the LLCA) and, as such, have the right to appoint a number of Global Indemnity Group, LLC’s directors equal in aggregate to the pro rata percentage of the voting power in Global Indemnity Group, LLC beneficially held by the Fox Paine Entities, rounded up to the nearest whole number of directors. The Fox Paine Entities beneficially own shares representing approximately 82.9% of the voting power of Global Indemnity Group, LLC as of June 30, 2021. The Fox Paine Entities control the appointment or election of all of Global Indemnity Group, LLC’s Directors due to the LLCA and their controlling share ownership. Global Indemnity Group, LLC’s Chairman is the chief executive and founder of Fox Paine & Company, LLC.
On August 27, 2020, Global Indemnity Group, LLC issued and sold to Wyncote LLC, an affiliate of Fox Paine & Company, LLC, 4,000 Series A Cumulative Fixed Rate Preferred Interests at a price of $1,000 per Series A Preferred Interest, for the aggregate purchase price of $4,000,000. While these preferred interests are non-voting, the preferred shareholders are entitled to appoint two additional members to Global Indemnity Group, LLC’s Board of Directors whenever the “Unpaid Targeted Priority Return” with respect to the preferred interests exceed zero immediately following six or more “Distribution Dates”, whether or not such Distribution Dates occur consecutively. Global Indemnity Group, LLC’s Board of Directors is obligated to take, and cause Global Indemnity Group, LLC’s officers to take, any necessary actions to effectuate such appointments, including expanding the size of the Board of Directors, in connection with any exercise of the foregoing provisions.
Management fee expense of $0.7 million and $0.8 million was incurred during the quarters ended June 30, 2021 and 2020, respectively, and management fee expense of $1.3 million and $1.4 million was incurred during the six months ended June 30, 2021 and 2020, respectively. Prepaid management fees, which were included in other assets on the consolidated balance sheets, were $0.5 million and $1.8 million as of June 30, 2021 and December 31, 2020, respectively.
In addition, Fox Paine & Company, LLC may also propose and negotiate transaction fees with the Company subject to the provisions of the Company’s related party transaction and conflict matter policies, including approval of Global Indemnity Group, LLC’s Conflicts Committee of the Board of Directors or Global Indemnity Limited’s Audit Committee of the Board of Directors, for those services from time to time. Each of the Company’s transactions with Fox Paine & Company, LLC are reviewed and approved by either Global Indemnity Group, LLC’s Conflicts Committee or Audit Committee, which is composed of independent directors, and the Board of Directors (other than Saul A. Fox, Chairman of the Board of Directors of Global Indemnity Group, LLC and Chief Executive of Fox Paine & Company, LLC, who is not a member of the Conflicts Committee and was not a member of Global Indemnity Limited’s Audit Committee and recused himself from the Board of Directors’ deliberations related to fees paid to Fox Paine & Company, LLC or its affiliates).
12.Commitments and Contingencies
The Company is, from time to time, involved in various legal proceedings in the ordinary course of business. The Company maintains insurance and reinsurance coverage for such risks in amounts that it considers adequate. However, there can be no assurance that the insurance and reinsurance coverage that the Company maintains is sufficient or will be available in adequate amounts or at a reasonable cost. The Company does not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material adverse effect on its business, results of operations, cash flows, or financial condition.
There is a greater potential for disputes with reinsurers who are in runoff. Some of the Company’s reinsurers’ have operations that are in runoff, and therefore, the Company closely monitors those relationships. The Company anticipates that, similar to the rest of the insurance and reinsurance industry, it will continue to be subject to litigation and arbitration proceedings in the ordinary course of business.
Commitments
In 2014, the Company entered into a $50 million commitment to purchase an alternative investment vehicle which is comprised of European non-performing loans. As of June 30, 2021, the Company has funded $35.8 million of this commitment leaving $14.2 million as unfunded. Since the investment period has concluded, the Company expects minimal capital calls will be made prospectively.
In 2017, the Company entered into a $50 million commitment to purchase an alternative investment vehicle comprised of stressed and distressed securities and structured products. As of June 30, 2021, the Company has funded $33.0 million of this commitment leaving $17.0 million as unfunded. Since the investment period has concluded, the Company expects minimal capital calls will be made prospectively.
In 2021, the Company entered into a $25 million commitment to purchase an alternative investment vehicle comprised of performing, stressed or distressed securities and loans across the global fixed income markets. As of June 30, 2021, the Company has fully funded this commitment.
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Other Commitments
The Company is party to a Management Agreement, as amended, with Fox Paine & Company, LLC, whereby in connection with certain management services provided to it by Fox Paine & Company, LLC, the Company agreed to pay an annual management fee to Fox Paine & Company, LLC. See Note 10 above for additional information pertaining to this management agreement.
COVID-19
There is risk that legislation could be passed or there could be a court ruling which would require the Company to cover business interruption claims regardless of terms, exclusions including the virus exclusions contained within the Company’s Commercial Specialty and Farm, Ranch & Stable policies, or other conditions included in policies that would otherwise preclude coverage.
13.
Share-Based Compensation Plans
Options
During the first quarter of 2021, the Company granted 140,000 Performance-Based Options under the Plan. The Performance-Based Options vest in 33% increments over a three-year period subject to the achievement of certain underwriting results and expire ten years after the grant date or the occurrence of certain events specified in the agreement, whichever is earlier. No stock options were awarded during the quarter ended June 30, 2021 or the quarter and six months ended June 30, 2020. No unvested options were forfeited during the quarter ended June 30, 2021. 300,000 unvested options were forfeited during the six months ended June 30, 2021. No unvested stock options were forfeited during the quarter and six months ended June 30, 2020.
Restricted Shares / Restricted Stock Units
There were no restricted class A common shares granted to key employees during the quarters and six months ended June 30, 2021 and 2020 and there were no restricted stock units granted to key employees during the quarters ended June 30, 2021 and 2020 or the six months ended June 30, 2021.
During the six months ended June 30, 2020, the Company granted 161,238 restricted stock units, with a weighted average grant date value of $30.32 per share, to key employees under the Plan. 3,375 of these restricted stock units will vest evenly over the next three years on January 1, 2021, January 1, 2022 and January 1, 2023.
66,957 of these restricted stock units will vest as follows:
10.0% vested on June 18, 2021. 20.0%, 30.0% and 40.0% of the restricted stock units will vest on June 18, 2022, June 18, 2023 and June 18, 2024, respectively.
The remaining 90,906 restricted stock units will vest as follows:
16.5% vested on January 1, 2021. 16.5% and 17.0% of the restricted stock units will vest on January 1, 2022 and January 1, 2023, respectively.
Subject to Board approval, 50% of restricted stock units will vest 100%, no later than March 15, 2023, following a re-measurement of 2019 results as of December 31, 2022.
During the quarter and six months ended June 30, 2021, there were 22,540 and 42,977 restricted stock units, respectively, that became fully vested. Upon vesting, the restricted stock units converted to restricted class A common shares. During the quarter and six months ended June 30, 2020, there were no restricted stock units that vested.
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During the quarters ended June 30, 2021 and 2020, the Company granted 19,738 and 28,482 class A common shares, respectively, at a weighted average grant date value of $28.71 and $23.70 per share, respectively, to non-employee directors of the Company under the Plan. Of the shares granted during the quarters ended June 30, 2021 and 2020, the vesting of 4,838 shares and 7,912 shares, respectively, is deferred until January 1, 2024 or a change of control, whichever is earlier. The remaining shares granted to non-employee directors of the Company in 2021 and 2020 were fully vested but are subject to certain restrictions.
During the six months ended June 30, 2021 and 2020, the Company granted 39,744 and 51,609 class A common shares, respectively, at a weighted average grant date value of $28.51 and $26.16 per share, respectively, to non-employee directors of the Company under the Plan. Of the shares granted during the six months ended June 30, 2021 and 2020, the vesting of 9,741 shares and 14,334 shares, respectively, is deferred until January 1, 2024 or a change of control, whichever is earlier. The remaining shares granted to non-employee directors of the Company in 2021 and 2020 were fully vested but are subject to certain restrictions.
Book Value Appreciation Rights (“BVAR”)
During the second quarter of 2021, the Company granted 2,500,000 Penn-Patriot BVARs with an aggregate initial notional value equal to approximately 5% of Penn-Patriot’s book value, which entitles the holder to a payment based on the value of the per-BVAR appreciation in Penn-Patriot’s book value over the initial notional value. The BVARs will vest by December 31, 2026, subject to the achievement of certain performance goals and continued employment as of the vesting date, with half of the applicable appreciation value of the BVARs payable on April 1, 2027 and an additional amount payable on April 1, 2030 following a true-up of underwriting results for the applicable performance period. The BVARs will vest in full in the event of a “change in control” of Penn-Patriot and a specified portion may vest in the event the holder is terminated by Penn-Patriot without cause.
During the second quarter of 2021, the Company also granted 400,000 Penn-Patriot BVARS with an aggregate initial notional value equal to approximately 0.8% of Penn-Patriot’s book value, which entitles the holder to a payment based on the value of the per-BVAR appreciation in Penn-Patriot’s book value over the initial notional value. The BVARs will vest by December 31, 2026, subject to the achievement of certain performance goals and continued employment as of the vesting date, with half of the applicable appreciation value of the BVARs payable on April 1, 2027 and an additional amount payable on April 1, 2030 following a true-up of underwriting results for the applicable performance period. The BVARs will vest in full in the event of a “Change in Control” of Penn-Patriot and a specified portion may vest in the event the holder is terminated by Penn-Patriot without cause.
There were no BVARs granted during the quarter and six months ended June 30, 2020.
Virtual Stock
10,000 shares of Penn-Patriot Virtual Stock with an initial notional value of $100,000 was granted during the second quarter of 2021. These shares have a three year cliff vesting period and are payable in either cash or Global Indemnity Group, LLC’s class A common shares at the discretion of Global Indemnity Group, LLC’s Board of Directors. There were no virtual shares issued during the quarter and six months ended June 30, 2020.
14.Earnings Per Share
Earnings per share have been computed using the weighted average number of common shares and common share equivalents outstanding during the period.
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The following table sets forth the computation of basic and diluted earnings per share:
(Dollars in thousands, except share and per share data)
Numerator:
Denominator:
Weighted average shares for basic earnings per share
Non-vested restricted stock
12,310
14,112
11,254
Non-vested restricted stock units
140,785
24,293
129,035
116,190
75,495
114,312
Weighted average shares for diluted earnings per share (1)
Earnings per share - Basic
Earnings per share - Diluted
If the Company had not incurred a loss in the six months ended June 30, 2020, 14,408,907 weighted average shares would have been used to compute the diluted loss per share calculation. In addition to the basic shares, weighted average shares for the diluted calculation for the six months ended June 30, 2020 would have included 15,195 shares of non-vested restricted stock, 29,691 shares of non-vested restricted stock units, and 101,496 share equivalents for options.
The weighted average shares outstanding used to determine dilutive earnings per share does not include 540,000 shares and 570,332 shares for the quarters ended June 30, 2021 and 2020, respectively, and 540,000 shares and 566,957 shares for the six months ended June 30, 2021 and 2020, respectively, which were deemed to be anti-dilutive.
15.
Segment Information
The insurance companies are managed through four business segments. Commercial Specialty offers specialty property and casualty products designed for product lines such as Small Business Binding Authority, Property Brokerage, and Programs. Specialty Property offers specialty personal lines property and casualty insurance products. Farm, Ranch & Stable offers specialized property and casualty coverage including Commercial Farm Auto and Excess/Umbrella Coverage for the agriculture industry as well as specialized insurance products for the equine mortality and equine major medical industry. Reinsurance Operations provides reinsurance solutions through brokers and primary writers including insurance and reinsurance companies.
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The following are tabulations of business segment information for the quarters and six months ended June 30, 2021 and 2020:
Commercial
Specialty
Specialty Property
Farm, Ranch & Stable
Reinsurance
Operations
96,680
33,013
20,851
24,692
88,332
29,749
17,880
80,146
29,892
17,960
21,410
458
40
512
30,350
18,000
21,424
149,920
51,818
15,302
11,161
12,657
29,633
12,579
7,187
7,814
Income (loss) from segments
(1,305
2,469
(348
953
1,769
Unallocated Items:
(6,329
(2,696
(844
Net income
Segment assets
881,795
210,362
141,009
292,078
1,525,244
Corporate assets
412,073
External business only, excluding business assumed from affiliates.
39
87,297
37,978
23,222
77,880
33,075
20,257
69,728
33,543
19,030
429
279
744
33,972
19,066
19,825
142,591
28,877
13,691
13,439
11,290
26,516
13,761
7,606
14,335
6,520
(1,979
2,840
21,716
Net investment loss
(8,618
(4,712
(7,005
753,310
203,561
140,658
277,242
1,374,771
738,377
2,113,148
184,012
66,371
41,853
46,558
166,847
59,448
35,483
156,296
60,483
36,101
40,228
888
74
(42
920
61,371
36,175
40,186
294,028
105,053
29,780
22,962
23,926
57,810
25,618
14,173
14,376
(6,567
5,973
(960
1,884
330
Other loss
(22
(10,605
(5,291
(641
41
168,128
73,221
45,355
150,363
63,082
39,362
137,442
67,759
37,713
856
72
912
68,615
37,785
43,385
287,227
66,312
31,189
23,049
24,394
52,509
27,993
15,244
18,621
9,433
(508
4,747
32,293
Net realized investment loss
(12,841
(9,577
Loss before income taxes
4,964
Net loss
16.
New Accounting Pronouncements
Accounting Standards Adopted in 2021
In December, 2019, the FASB issued updated guidance related to the accounting for income taxes. The updated guidance is intended to simplify the accounting for income taxes by removing several exceptions contained in existing guidance and amending other existing guidance to simplify several other income tax accounting matters. The updated guidance is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. The Company adopted this guidance on January 1, 2021. The adoption of this new accounting guidance did not have a material impact on the Company’s financial condition, results of operations, or cash flows.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes of the Company included elsewhere in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to the Company’s plans and strategy, constitutes forward-looking statements that involve risks and uncertainties. Please see "Cautionary Note Regarding Forward-Looking Statements" at the end of this Item 2 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein. For more information regarding the Company’s business and operations, please see the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Recent Developments
Appointment of Chief Executive
On April 19, 2021, the Company announced that David S. Charlton was named chief executive of the Company’s insurance operations and was appointed to serve as the principal executive officer of the Company. Furthermore, in connection with Mr. Charlton’s appointment, the board of directors of Global Indemnity Group, LLC (the “Board”) has increased the size of the Board from six to seven directors and appointed Mr. Charlton to fill the newly-created directorship, in each case, with effect as of execution of the CEO Agreement.
Appointment of Chief Operations Officer
On May 17, 2021, the Company announced that Reiner R. Mauer was named Chief Operations Officer of the Company’s insurance business and will serve as the principal operating officer of the Company.
The global outbreak of COVID-19 continues to present significant risks to the Company. The COVID-19 pandemic may affect the Company’s operations indefinitely. The Company may experience reductions in premium volume, delays in the collection of premiums, and increases in COVID-19 related claims. Any resulting volatility in the global financial markets may negatively impact the market value of the Company’s investment portfolio and may result in net realized investment losses as well as a decline in the liquidity of the investment portfolio. All of these factors may have far reaching impacts on the Company’s business, operations, and financial results and conditions, directly and indirectly, including without limitation impacts on the health of the Company’s management and employees, distribution, marketing, customers and agents, and on the overall economy. The scope and nature of these impacts, most of which are beyond the Company’s control, continue to evolve and such effects could exist for an extended period of time even after the pandemic ends.
Distributions
During 2021, the Board of Directors approved a distribution payment of $0.25 per common share to all shareholders of record on the close of business on March 22, 2021 and June 21, 2021. Distributions paid to common shareholders were $7.2 million during the six months ended June 30, 2021. In addition, distributions of $0.2 million were paid to Global Indemnity Group, LLC’s preferred shareholder during the six months ended June 30, 2021.
AM Best Rating
AM Best has seven Rating Categories in the AM Best Financial Strength Rating Scale. The categories ranging from best to worst are Superior, Excellent, Good, Fair, Marginal, Weak and Poor. Within each rating category, there are rating notches of plus or minus to show additional gradation of the ratings. On April 21, 2021, AM Best affirmed the financial strength rating of "A" (Excellent) for the U.S. operating subsidiaries of Global Indemnity Group, LLC.
Overview
The Company’s Commercial Specialty segment sells its property and casualty insurance products through a group of approximately 195 professional general agencies that have limited quoting and binding authority, as well as a number of wholesale insurance brokers who in turn sell the Company’s insurance products to insureds through retail insurance brokers. Commercial Specialty operates predominantly in the excess and surplus lines marketplace. The Company manages its Commercial Specialty segment via product classifications. These product classifications are: 1) Penn-America, which includes property and general liability products for small commercial businesses sold through a select network of wholesale general agents with specific binding authority; 2) United National, which includes property, general liability, and professional lines products sold through program administrators with specific binding authority; 3) Diamond State, which includes property, casualty, and professional lines products sold through wholesale brokers and program administrators with specific binding authority; and 4) Vacant Express, which primarily insures dwellings which are currently vacant, undergoing renovation, or are under construction and is sold through aggregators, brokers, and retail agents.
The Company’s Specialty Property segment, primarily via American Reliable, offers specialty personal lines property and casualty insurance products through a group of approximately 205 agents, primarily comprised of wholesale general agents, with specific binding authority.
The Company’s Farm, Ranch & Stable segment, primarily via American Reliable, provides specialized property and casualty coverage including Commercial Farm Auto and Excess/Umbrella Coverage for the agriculture industry as well as specialized insurance products for the equine mortality and equine major medical industry. These insurance products are sold through a group of approximately 215 agents, primarily comprised of wholesalers and retail agents, with a selected number having specific binding authority.
The Company’s Reinsurance Operations provides reinsurance solutions through brokers and on a direct basis. It uses its capital capacity to write niche and specialty-focused treaties and business which meet the Company’s risk tolerance and return thresholds. Prior to the redomestication, the Company’s Reinsurance Operations consisted solely of the operations of Global Indemnity Reinsurance. In connection with the redomestication, Global Indemnity Reinsurance merged into Penn-Patriot Insurance Company and all of its business was assumed by the Company’s existing insurance company subsidiaries.
The Company derives its revenues primarily from premiums paid on insurance policies that it writes and from income generated by its investment portfolio, net of fees paid for investment management services. The amount of insurance premiums that the Company receives is a function of the amount and type of policies it writes, as well as prevailing market prices.
The Company’s expenses include losses and loss adjustment expenses, acquisition costs and other underwriting expenses, corporate and other operating expenses, interest, investment expenses, and income taxes. Losses and loss adjustment expenses are estimated by management and reflect the Company’s best estimate of ultimate losses and costs arising during the reporting period and revisions of prior period estimates. The Company records its best estimate of losses and loss adjustment expenses considering both internal and external actuarial analyses of the estimated losses the Company expects to incur on the insurance policies it writes. The ultimate losses and loss adjustment expenses will depend on the actual costs to resolve claims. Acquisition costs consist principally of commissions and premium taxes that are typically a percentage of the premiums on the insurance policies the Company writes, net of ceding commissions earned from reinsurers. Other underwriting expenses consist primarily of personnel expenses and general operating expenses related to underwriting activities. Corporate and other operating expenses are comprised primarily of outside legal fees, other professional and accounting fees, directors’ fees, management fees & advisory fees, and salaries and benefits for company personnel whose services relate to the support of corporate activities. Interest expense is primarily comprised of amounts due on outstanding debt.
Critical Accounting Estimates and Policies
The Company’s consolidated financial statements are prepared in conformity with GAAP, which require it to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.
44
The most critical accounting policies involve significant estimates and include those used in determining the liability for unpaid losses and loss adjustment expenses, recoverability of reinsurance receivables, investments, fair value measurements, goodwill and intangible assets, deferred acquisition costs, and taxation. For a detailed discussion on each of these policies, please see the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. There have been no significant changes to any of these policies or underlying methodologies during the current year except for the following:
The receipt of results for investments in limited partnerships and limited liability companies may vary. If results are received on a timely basis, they are included in current results. If they are not received on a timely basis, they are recorded on a one quarter lag. The recording of such results is applied consistently for each investment once the timing of receiving the results has been established.
Results of Operations
The following table summarizes the Company’s results for the quarters and six months ended June 30, 2021 and 2020:
Quarters Ended
June 30,
Six Months Ended
Change
6.5
5.8
9.1
7.7
5.3
2.4
(31.2
%)
Losses and expenses:
35.1
25.4
6.8
Underwriting income
(91.9
(99.0
NM
163.4
(90.0
125.8
(59.1
(26.6
(42.8
(44.8
(83.8
(88.0
(112.9
(83.0
Underwriting Ratios:
Loss ratio (1):
60.9
47.4
62.0
50.6
Expense ratio (2)
38.3
37.8
38.2
38.4
Combined ratio (3)
99.2
85.2
100.2
89.0
NM – not meaningful
The loss ratio is a GAAP financial measure that is generally viewed in the insurance industry as an indicator of underwriting profitability and is calculated by dividing net losses and loss adjustment expenses by net earned premiums.
The expense ratio is a GAAP financial measure that is calculated by dividing the sum of acquisition costs and other underwriting expenses by net earned premiums.
The combined ratio is a GAAP financial measure and is the sum of the Company’s loss and expense ratios.
45
Premiums
The following table summarizes the change in premium volume by business segment:
% Change
Gross written premiums (1)
Commercial Specialty
10.7
9.4
(13.1
(9.4
(10.2
(7.7
Reinsurance (3)
53.8
38.7
Total gross written premiums
Ceded written premiums
8,348
9,417
(11.4
17,165
17,765
(3.4
3,264
4,903
(33.4
6,923
10,139
(31.7
2,971
2,965
0.2
6,370
5,993
6.3
Total ceded written premiums
14,583
17,285
(15.6
30,458
33,897
(10.1
Net written premiums (2)
13.4
11.0
(5.8
(11.7
(9.9
Total net written premiums
14.9
13.7
(10.9
(10.7
(5.6
(4.3
9.5
(7.3
Total net earned premiums
Gross written premiums represent the amount received or to be received for insurance policies written without reduction for reinsurance costs, ceded premiums, or other deductions.
Net written premiums equal gross written premiums less ceded written premiums.
Gross written premiums increased by 6.5% and 5.8% for the quarter and six months ended June 30, 2021, respectively, as compared to same periods in 2020. This increase is mainly due to the continued growth of existing programs, increased pricing, and several new programs within Commercial Specialty as well as the organic growth of an existing casualty treaty and the assumption of three new smaller casualty treaties within Reinsurance Operations. This growth in premiums was partially offset by the continued reduction of catastrophe exposed business within both Specialty Property and Farm, Ranch & Stable, the continued reduction in business not providing an adequate return on capital within Specialty Property, the non-renewal of its property catastrophe treaties within Reinsurance Operations, and actions taken by Commercial Specialty to reduce risk and increase profitability of Property Brokerage.
46
Net Retention
The ratio of net written premiums to gross written premiums is referred to as the Company’s net premium retention. The Company’s net premium retention is summarized by segments as follows:
Point
91.4
89.2
2.2
90.7
89.4
1.3
90.1
87.1
3.0
89.6
86.2
3.4
85.8
87.2
(1.4
84.8
86.8
(2.0
100.0
91.7
89.5
91.0
The net premium retention for the quarter and six months ended June 30, 2021 increased by 2.2 points and 1.6 points, respectively, as compared to the same periods in 2020. This increase in retention is primarily driven by the restructuring of the Company’s catastrophe reinsurance treaties which occurred on June 1, 2020 as well as a change in the mix of business.
Net Earned Premiums
Net earned premiums within the Commercial Specialty segment increased by 14.9% and 13.7% for the quarter and six months ended June 30, 2021, respectively, as compared to the same periods in 2020. The increase in net earned premiums was primarily due to a growth in premiums written as a result of organic growth from existing agents, pricing increases, and several new programs partially offset by a reduction in Property Brokerage’s net earned premiums as a result of actions taken to reduce risk and increase profitability. Property net earned premiums were $33.0 million and $31.9 million for the quarters ended June 30, 2021 and 2020, respectively, and $67.5 million and $62.4 million for the six months ended June 30, 2021 and 2020, respectively. Casualty net earned premiums were $47.1 million and $37.8 million for the quarters ended June 30, 2021 and 2020, respectively, and $88.8 million and $75.0 million for the six months ended June 30, 2021 and 2020, respectively.
Net earned premiums within the Specialty Property segment decreased by 10.9% and 10.7% for the quarter and six months ended June 30, 2021, respectively, as compared to the same periods in 2020 primarily due to a continued reduction of catastrophe exposed business and a reduction in business not providing an adequate return on capital. Property net earned premiums were $28.1 million and $31.2 million for the quarters ended June 30, 2021 and 2020, respectively, and $56.9 million and $62.8 million for the six months ended June 30, 2021 and 2020, respectively. Casualty net earned premiums were $1.8 million and $2.4 million for the quarters ended June 30, 2021 and 2020, respectively, and $3.6 million and $4.9 million for the six months ended June 30, 2021 and 2020, respectively.
Net earned premiums within the Farm, Ranch & Stable segment decreased by 5.6% and 4.3% for the quarter and six months ended June 30, 2021, respectively, as compared to the same periods in 2020. The decrease in net earned premiums was primarily due to the continued reduction of catastrophe exposed business. Property net earned premiums were $13.4 million and $13.7 million for the quarters ended June 30, 2021 and 2020, respectively, and $27.0 million and $27.1 million for the six months ended June 30, 2021 and 2020, respectively. Casualty net earned premiums were $4.6 million and $5.3 million for the quarters ended June 30, 2021 and 2020, respectively, and $9.1 million and $10.6 million for the six months ended June 30, 2021 and 2020, respectively.
Net earned premiums within the Reinsurance Operations segment increased by 9.5% for the quarter ended June 30, 2021 as compared to the same period in 2020 primarily due to organic growth of an existing casualty treaty partially offset by a reduction in premiums written due to the non-renewal of its property catastrophe treaties. Net earned premiums decreased by 7.3% for the six months ended June 30, 2021 as compared to the same period in 2020 primarily due to a reduction in premiums written due to the non-renewal of its property catastrophe treaties partially offset by the organic growth of an existing casualty treaty. Property net earned premiums were $3.4 million and $9.1 million for the quarters ended June 30, 2021 and 2020, respectively, and $5.4 million and $19.0 million for the six months ended June 30, 2021 and 2020, respectively. Casualty net earned premiums were $18.1 million and $10.5 million for the quarters ended June 30, 2021 and 2020, respectively, and $34.9 million and $24.4 million for the six months ended June 30, 2021 and 2020, respectively.
47
Reserves
Management’s best estimate at June 30, 2021 was recorded as the loss reserve. Management’s best estimate is as of a particular point in time and is based upon known facts, the Company’s actuarial analyses, current law, and the Company’s judgment. This resulted in carried gross and net reserves of $697.6 million and $610.5 million, respectively, as of June 30, 2021. A breakout of the Company’s gross and net reserves, as of June 30, 2021, is as follows:
Gross Reserves
Case
IBNR (1)
178,475
279,116
457,591
13,117
25,280
38,397
12,614
32,412
45,026
Reinsurance Operations
44,185
112,419
156,604
248,391
449,227
Net Reserves (2)
142,426
241,976
384,402
10,904
21,906
32,810
11,613
25,038
36,651
209,128
401,339
Losses incurred but not reported, including the expected future emergence of case reserves.
Does not include reinsurance receivable on paid losses.
Each reserve category has an implicit frequency and severity for each accident year as a result of the various assumptions made. If the actual levels of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s best estimate. For most of its reserve categories, the Company believes that frequency can be predicted with greater accuracy than severity. Therefore, the Company believes management’s best estimate is more likely influenced by changes in severity than frequency. The following table, which the Company believes reflects a reasonable range of variability around its best estimate based on historical loss experience and management’s judgment, reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity on the Company’s current accident year net loss estimate of $179.6 million for claims occurring during the six months ended June 30, 2021:
Severity Change
-10%
-5%
0%
5%
10%
Frequency Change
(26,042
(17,511
(8,980
(449
8,082
-3%
(22,809
(14,099
(5,388
3,323
12,033
-2%
(21,193
(12,392
(3,592
5,208
14,009
-1%
(19,576
(10,686
(1,796
7,094
15,984
(17,960
8,980
1%
(16,344
(7,274
1,796
10,866
19,936
2%
(14,727
(5,568
3,592
12,752
21,911
3%
(13,111
(3,861
5,388
14,637
23,887
(9,878
18,409
27,838
The Company’s net reserves for losses and loss adjustment expenses of $610.5 million as of June 30, 2021 relate to multiple accident years. Therefore, the impact of changes in frequency and severity for more than one accident year could be higher or lower than the amounts reflected above.
48
Underwriting Results
The components of income and loss from the Company’s Commercial Specialty segment and corresponding underwriting ratios are as follows:
79.4
58.4
11.8
10.1
Underwriting income (loss)
(109.1
(135.3
Loss ratio:
Current accident year
57.2
61.8
(4.6
63.7
58.6
Prior accident year
7.4
(20.4
27.8
3.6
(10.4
14.0
Calendar year loss ratio
64.6
23.2
67.3
48.2
19.1
Expense ratio
37.0
38.0
(1.0
(1.2
Combined ratio
101.6
22.2
104.3
86.4
17.9
49
Reconciliation of non-GAAP financial measures and ratios
The table below reconciles the non-GAAP measures or ratios, which excludes the impact of prior accident year adjustments, to its most directly comparable GAAP measure or ratio. The Company believes the non-GAAP measures or ratios are useful to investors when evaluating the Company's underwriting performance as trends within Commercial Specialty may be obscured by prior accident year adjustments. These non-GAAP measures or ratios should not be considered as a substitute for its most directly comparable GAAP measure or ratio and does not reflect the overall underwriting profitability of the Company.
Loss
Ratio
Property
Non catastrophe property losses and ratio excluding the effect of prior accident year (1)
16,093
48.8
14,563
45.6
36,385
53.9
26,812
42.9
Effect of prior accident year
224
0.7
689
(1,339
0.5
Non catastrophe property losses and ratio (2)
16,317
49.5
15,252
47.8
35,046
51.9
27,142
43.4
Catastrophe losses and ratio excluding the effect of prior accident year (1)
8.1
9,866
30.9
12,970
19.2
13,579
21.8
6,779
20.5
5,099
16.0
8,102
12.0
5,437
8.7
Catastrophe losses and ratio (2)
9,445
28.6
14,965
46.9
21,072
31.2
19,016
30.5
Total property losses and ratio excluding the effect of prior accident year (1)
18,759
56.9
24,429
76.5
49,355
73.1
40,391
64.7
7,003
21.2
5,788
18.2
6,763
10.0
5,767
9.2
Total property losses and ratio (2)
25,762
78.1
30,217
94.7
56,118
83.1
46,158
73.9
Casualty
Total casualty losses and ratio excluding the effect of prior accident year (1)
27,097
57.5
18,697
49.4
50,146
56.5
40,170
53.6
(1,041
(2.2
(20,037
(53.0
(1,211
(20,016
(26.7
Total casualty losses and ratio (2)
26,056
55.3
(1,340
(3.6
48,935
55.1
20,154
26.9
Total net losses and loss adjustment expense and total loss ratio excluding the effect of prior accident year (1)
45,856
43,126
99,501
80,561
5,962
(14,249
5,552
Total net losses and loss adjustment expense and total loss ratio (2)
Non-GAAP measure / ratio
Most directly comparable GAAP measure / ratio
See “Result of Operations” above for a discussion on consolidated premiums.
50
Loss Ratio
The current accident year losses and loss ratio is summarized as follows:
Property losses
Non-catastrophe
10.5
35.7
Catastrophe
(73.0
(4.5
(23.2
Casualty losses
44.9
24.8
Total accident year losses
23.5
Current accident year loss ratio:
3.2
(22.8
(2.6
Property loss ratio
(19.6
8.4
Casualty loss ratio
2.9
Total accident year loss ratio
The current accident year non-catastrophe property loss ratio increased by 3.2 points during the quarter ended June 30, 2021 as compared to the same period in 2020 reflecting higher claims severity in the second accident quarter compared to last year.
The current accident year non-catastrophe property loss ratio increased by 11.0 points during the six months ended June 30, 2021 as compared to the same period in 2020 due to higher claims severity for the first six months compared to last year.
The current accident year catastrophe loss ratio improved by 22.8 points during the quarter ended June 30, 2021 as compared to the same period in 2020 recognizing lower claims frequency and severity in the second accident quarter compared to last year.
The current accident year catastrophe loss ratio improved by 2.6 points during the six months ended June 30, 2021 as compared to the same period in 2020 due to lower claims frequency through six months compared to last year.
The current accident year casualty loss ratio increased by 8.1 points during the quarter ended June 30, 2021 as compared to the same period in 2020 reflecting higher claims frequency in the second accident quarter compared to last year.
The current accident year casualty loss ratio increased by 2.9 points during the six months ended June 30, 2021 as compared to the same period in 2020 due to higher claims frequency through six months compared to last year.
The calendar year loss ratio for the quarter and six months ended June 30, 2021 includes an increase of $6.0 million, or 7.4 percentage points, and an increase of $5.6 million, or 3.6 percentage points, respectively, related to reserve development on prior accident years. The calendar year loss ratio for the quarter and six months ended June 30, 2020 includes a decrease of $14.2 million, or 20.4 percentage points, and a decrease of $14.2 million, or 10.4 percentage points, respectively, related to reserve development on prior accident years. Please see Note 8 of the notes to the consolidated financial statements in Item 1 of Part I of this report for further discussion on prior accident year development.
51
Expense Ratios
The expense ratio for the Company’s Commercial Specialty segment improved by 1.0 points from 38.0% for the quarter ended June 30, 2020 to 37.0% for the quarter ended June 30, 2021 and improved by 1.2 points from 38.2% for the six months ended June 30, 2020 to 37.0% for the six months ended June 30, 2021. The improvement in the expense ratio is primarily due to higher earned premiums.
COVID-19’s lasting impacts could result in declines in business, non-payment of premiums, and increases in claims that could adversely affect Commercial Specialty’s business, financial condition, and results of operation.
There is continued risk that legislation could be passed or there could be a court ruling which would require the Company to cover business interruption claims regardless of terms, exclusions including the virus exclusions contained within the Company’s Commercial Specialty policies, or other conditions included in these policies that would otherwise preclude coverage.
The components of income from the Company’s Specialty Property segment and corresponding underwriting ratios are as follows:
3.7
(10.6
(8.6
(8.5
(62.1
(36.7
51.2
54.5
(3.3
52.8
(0.9
(13.7
(2.7
(6.8
4.1
40.8
10.4
49.2
46.0
42.1
41.0
1.1
42.4
41.3
93.3
81.8
11.5
91.6
87.3
4.3
The table below reconciles the non-GAAP measures or ratios, which excludes the impact of prior accident year adjustments, to its most directly comparable GAAP measure or ratio. The Company believes the non-GAAP measures or ratios are useful to investors when evaluating the Company's underwriting performance as trends within Specialty Property may be obscured by prior accident year adjustments. These non-GAAP measures or ratios should not be considered as a substitute for its most directly comparable GAAP measure or ratio and does not reflect the overall underwriting profitability of the Company.
10,692
11,032
35.4
23,386
41.1
25,425
40.5
(55
(0.2
(3,383
(340
(3,045
(4.8
10,637
7,649
24.5
23,046
22,380
13.0
6,228
20.0
6,075
8,307
13.2
(57
209
0.3
3,720
6,406
20.6
6,018
10.6
8,516
13.5
14,343
51.0
17,260
55.4
29,461
51.8
33,732
53.7
(3,205
(10.3
(397
(0.7
(2,836
14,357
14,055
45.1
29,064
51.1
30,896
54.0
1,019
43.1
1,944
2,045
41.5
(2
(1,383
(58.5
(1,228
(34.1
(1,752
(35.6
945
(364
(15.4
716
19.9
293
5.9
15,290
18,279
31,405
35,777
(4,588
(1,625
53
Other Income
Other income was $0.5 million and $0.4 million for the quarters ended June 30, 2021 and 2020, respectively, and $0.9 million for both the six months ended June 30, 2021 and 2020. Other income is primarily comprised of fee income.
(3.1
(8.0
(41.4
(26.9
(16.9
(12.7
(7.1
(4.9
(16.4
(12.2
(7.0
(2.5
(4.4
(1.9
10.9
12.5
The current accident year non-catastrophe property loss ratio increased by 2.6 points during the quarter ended June 30, 2021 as compared to the same period in 2020 reflecting higher claims severity in the second accident quarter compared to last year.
The current accident year non-catastrophe property loss ratio increased by 0.6 points during the six months ended June 30, 2021 as compared to the same period in 2020 due to higher claims severity for the first six months compared to last year.
The current accident year catastrophe loss ratio improved by 7.0 points during the quarter ended June 30, 2021 as compared to the same period in 2020 recognizing lower claims frequency in the second accident quarter compared to last year.
The current accident year catastrophe loss ratio improved by 2.5 points during the six months ended June 30, 2021 as compared to the same period in 2020 due to lower claims frequency and severity through six months compared to last year.
The current accident year casualty loss ratio increased by 10.9 points during the quarter ended June 30, 2021 as compared to the same period in 2020 reflecting higher claims frequency in the second accident quarter compared to last year.
The current accident year casualty loss ratio increased by 12.5 points during the six months ended June 30, 2021 as compared to the same period in 2020 due to higher claims frequency through six months compared to last year.
The calendar year loss ratio for the quarter and six months ended June 30, 2021 includes an increase of less than $0.1 million, or 0.0 percentage points, and a decrease of $1.6 million, or 2.7 percentage points, respectively, related to reserve development on prior accident years. The calendar year loss ratio for the quarter and six months ended June 30, 2020 includes a decrease of $4.6 million, or 13.7 percentage points, and a decrease of $4.6 million, or 6.8 percentage points, respectively, related to reserve development on prior accident years. Please see Note 8 of the notes to the consolidated financial statements in Item 1 of Part I of this report for further discussion on prior accident year development.
54
The expense ratio for the Company’s Specialty Property segment increased 1.1 points from 41.0% for the quarter ended June 30, 2020 to 42.1% for the quarter ended June 30, 2021 and increased by 1.1 points from 41.3% for the six months ended June 30, 2020 to 42.4% for the six months ended June 30, 2021. The increase in the expense ratio is primarily due to a reduction in earned premiums.
COVID-19’s lasting impacts could result in declines in business and non-payment of premiums that could adversely affect Specialty Property’s business, financial condition, and results of operation.
55
The components of loss from the Company’s Farm, Ranch & Stable segment and corresponding underwriting ratios are as follows:
11.1
2.8
(17.0
(0.4
(5.5
Underwriting loss
(82.4
62.7
74.8
(12.1
66.0
63.2
(4.2
(2.4
(2.1
62.1
70.6
63.6
61.1
2.5
40.0
39.3
40.4
(1.1
102.1
110.6
102.9
101.5
1.4
56
The table below reconciles the non-GAAP measures or ratios, which excludes the impact of prior accident year adjustments, to its most directly comparable GAAP measure or ratio. The Company believes the non-GAAP measures or ratios are useful to investors when evaluating the Company's underwriting performance as trends within Farm, Ranch & Stable may be obscured by prior accident year adjustments. These non-GAAP measures or ratios should not be considered as a substitute for its most directly comparable GAAP measure or ratio and does not reflect the overall underwriting profitability of the Company.
7,457
55.7
4,737
34.6
13,424
49.8
9,814
36.2
(14
(707
(5.2
301
(1,265
(4.7
7,443
55.6
4,030
29.4
13,725
50.9
8,549
31.5
1,372
10.2
7,117
52.0
5,499
20.4
8,518
31.4
0.1
(1,035
(3.8
561
2.1
1,382
10.3
7,128
52.1
4,464
16.6
9,079
33.5
8,829
65.9
11,854
86.6
18,923
70.2
18,332
67.6
(4
(696
(5.1
(734
(704
8,825
11,158
81.5
18,189
67.5
17,628
65.0
2,439
53.4
2,388
44.7
4,891
53.5
5,520
(103
(2.3
(107
(1.3
(99
2,336
2,281
42.7
4,773
52.2
5,421
14,242
23,814
23,852
(803
(852
57
Other income was less than $0.1 million for each of the quarters ended June 30, 2021 and 2020 and $0.1 million for both the six months ended June 30, 2021 and 2020. Other income is primarily comprised of fee income.
57.4
36.8
(80.7
(35.4
(25.5
(20.9
21.1
13.6
(41.8
(11.0
(20.7
The current accident year non-catastrophe property loss ratio increased by 21.1 points during the quarter ended June 30, 2021 as compared to the same period in 2020 reflecting higher claims frequency and severity in the second accident quarter compared to last year.
The current accident year non-catastrophe property loss ratio increased by 13.6 points during the six months ended June 30, 2021 as compared to the same period in 2020 due to higher claims frequency and severity through six months compared to last year.
The current accident year catastrophe loss ratio improved by 41.8 points during the quarter ended June 30, 2021 as compared to the same period in 2020 recognizing lower claims frequency and severity in the second accident quarter compared to last year.
The current accident year catastrophe loss ratio improved by 11.0 points during the six months ended June 30, 2021 as compared to the same period in 2020 due to lower claims frequency and severity through six months compared to last year.
The current accident year casualty loss ratio increased by 8.7 points during the quarter ended June 30, 2021 as compared to the same period in 2020 reflecting higher claims frequency in the second accident quarter compared to last year.
The current accident year casualty loss ratio increased by 1.5 points during the six months ended June 30, 2021 as compared to the same period in 2020 due to higher claims frequency through six months compared to last year.
The calendar year loss ratio for the quarter and six months ended June 30, 2021 includes a decrease of $0.1 million, or 0.6 percentage points, and a decrease of $0.9 million, or 2.4 percentage points, respectively, related to reserve development on prior accident years. The calendar year loss ratio for the quarter and six months ended June 30, 2020 includes a decrease of $0.8 million, or 4.2 percentage points, and a decrease of $0.8 million, or 2.1 percentage points, respectively, related to reserve development on prior accident years. Please see Note 8 of the notes to the consolidated financial statements in Item 1 of Part I of this report for further discussion on prior accident year development.
58
The expense ratio for the Company’s Farm, Ranch & Stable Segment was 40.0% for both the quarter ended June 30, 2021 and June 30, 2020. The expense ratio improved 1.1 points from 40.4% for the six months ended June 30, 2020 to 39.3% for the six months ended June 30, 2021. The improvement in the expense ratio is primarily due to a reduction of commission rate partially driven by a change in agent distribution as well as a reduction in compensation, travel, and advertising expenses.
There is continued risk that legislation could be passed or there could be a court ruling which would require the Company to cover business interruption claims regardless of terms, exclusions including the virus exclusions contained within the Company’s Farm, Ranch & Stable policies, or other conditions included in these policies that would otherwise preclude coverage.
COVID-19’s lasting impacts could result in declines in business, non-payment of premiums, and increases in claims that could adversely affect Farm, Ranch & Stable’s business, financial condition, and results of operation.
The components of income from the Company’s Reinsurance Operations segment and corresponding underwriting ratios are as follows:
2020 (1)
(95.0
162.5
(7.4
12.1
37.2
(66.4
(60.3
Current accident year (2)
60.7
56.1
4.6
61.9
56.8
(1.6
1.7
(1.8
Calendar year loss ratio (3)
59.1
57.8
59.5
56.2
3.3
36.5
29.1
32.8
95.6
86.9
95.2
6.2
External business only, excluding business assumed from affiliates
Non-GAAP ratio
Most directly comparable GAAP ratio
59
Reconciliation of non-GAAP financial ratios
The table above includes a reconciliation of the current accident year loss ratio, which is a non-GAAP ratio, to its calendar year loss ratio, which is its most directly comparable GAAP ratio. The Company believes the non-GAAP ratio is useful to investors when evaluating the Company's underwriting performance as trends in the Company's Reinsurance Operations may be obscured by prior accident year adjustments. This non-GAAP ratio should not be considered as a substitute for its most directly comparable GAAP ratio and does not reflect the overall underwriting profitability of the Company.
Other Loss
The Company recognized other income of less than $0.1 million and $0.3 million during the quarters and six months ended June 30, 2021 and 2020, respectively, and recognized a loss of less than $0.1 million for both the six months ended June 30, 2021 and 2020. Other loss is comprised of foreign exchange gains and losses.
The current accident year loss ratio increased by 4.6 points during the quarter ended June 30, 2021 as compared to the same period in 2020. The increase in the current accident year loss ratio reflects a mix of business shift to more casualty premium which has a higher expected loss ratio than property. The casualty net earned premium was 84% of the total Reinsurance Operations earned premium compared to 54% in 2020.
The current accident year loss ratio increased by 5.1 points during the six months ended June 30, 2021 as compared to the same period in 2020. The increase in the current accident year loss ratio reflects a mix of business shift to more casualty premium which has a higher expected loss ratio than property. The casualty net earned premium was 87% of the total Reinsurance Operations earned premium compared to 56% in 2020.
The calendar year loss ratio for the quarter and six months ended June 30, 2021 includes a decrease of $0.3 million, or 1.6 percentage points, and a decrease of $1.0 million, or 2.4 percentage points, respectively, related to reserve development on prior accident years. The calendar year loss ratio for the quarter and six months ended June 30, 2020 includes an increase of $0.3 million, or 1.7 percentage points, and a decrease of $0.3 million, or 0.6 percentage points, respectively, related to reserve development on prior accident years. Please see Note 8 of the notes to the consolidated financial statements in Item 1 of Part I of this report for further discussion on prior accident year development.
Expense Ratio
The expense ratio for the Company’s Reinsurance Operations increased by 7.4 points from 29.1% for the quarter ended June 30, 2020 to 36.5% for the quarter ended June 30, 2021 and increased by 2.9 points from 32.8% for the six months ended June 30, 2020 to 35.7% for the six months ended June 30, 2021. The increase in the expense ratio is primarily due to a change in business mix as well as an increase in profit commissions.
COVID-19’s lasting impacts could result in declines in business, non-payment of premiums, and increases in claims that could adversely affect the Reinsurance Operations’ business, financial condition, and results of operation.
Unallocated Corporate Items
The Company’s fixed income portfolio, excluding cash, continues to maintain high quality with an A+ average rating and a duration of 4.5 years.
60
Gross investment income (loss) (1)
660.0
139.6
Investment expenses
83.0
550.7
Excludes realized gains and losses
Gross investment income (loss) increased by 660.0% and 139.6% for the quarter and six months ended June 30, 2021, respectively, as compared to the same period in 2020. The increase was primarily due to increased returns from alternative investments offset by a decrease in yield within the fixed maturities portfolio.
Investment expenses increased by 83.0% and 0.9% for the quarter and six months ended June 30, 2021, respectively, as compared to the same period in 2020 due to including investment expenses related to mutual funds as a direct offset to investment income during the prior year. The Company divested its investments in mutual funds during January 2021.
At June 30, 2021, the Company held agency mortgage-backed securities with a market value of $207.7 million. Excluding the agency mortgage-backed securities, the average duration of the Company’s fixed maturities portfolio was 4.7 years as of June 30, 2021, compared with 4.8 years as of June 30, 2020. Including cash and short-term investments, the average duration of the Company’s fixed maturities portfolio, excluding agency mortgage-backed securities, was 4.5 years as of June 30, 2021, and June 30, 2020, respectively. Changes in interest rates can cause principal payments on certain investments to extend or shorten which can impact duration. The Company’s embedded book yield on its fixed maturities, not including cash, was 2.3% as of June 30, 2021, compared to 2.5% as of June 30, 2020. The embedded book yield on the $64.5 million of taxable municipal bonds in the Company’s portfolio, was 3.0% at June 30, 2021, compared to an embedded book yield of 3.1% on the Company’s taxable municipal bonds of $63.8 million at June 30, 2020.
Derivatives
See Note 3 of the notes to the consolidated financial statements in Item 1 of Part I of this report for an analysis of total investment return on a pre-tax basis for the quarters and six months ended June 30, 2021 and 2020.
61
Corporate and Other Operating Expenses
Corporate and other operating expenses consist of outside legal fees, other professional fees, directors’ fees, management fees & advisory fees, salaries and benefits for holding company personnel, development costs for new products, and taxes incurred which are not directly related to operations. Corporate and other operating expenses were $6.3 million and $8.6 million during the quarters ended June 30, 2021 and 2020, respectively, and $10.6 million and $12.8 million during the six months ended June 30, 2021 and 2020, respectively. Corporate expenses were higher in 2020 due to incurring additional professional fees related to the redomestication.
Interest Expense
Interest expense decreased 42.8% and 44.8% during the quarter and six months ended June 30, 2021, respectively, as compared to the same period in 2020 primarily due to the redemption of the Company’s 7.75% Subordinated Notes due in 2045 and the repayment of the margin borrowing facility in August, 2020.
Income Tax Expense (Benefit)
Income tax expense was $0.8 million for the quarter ended June 30, 2021 compared with an income tax expense of $7.0 million for the quarter ended June 30, 2020. The reduction is driven by lower pre-tax income for the Company’s U.S. Subsidiaries.
Income tax expense was $0.6 million for the six months ended June 30, 2021 compared with an income tax benefit of $5.0 million for the six months ended June 30, 2020. The increase in the income tax benefit is primarily due to investment losses incurred by the Company’s U.S. subsidiaries during the six months ended June 30, 2020.
See Note 7 of the notes to the consolidated financial statements in Item 1 of Part I of this report for a comparison of income tax between periods.
Net Income (Loss)
The factors described above resulted in a net income of $6.4 million and net income of $37.6 million for the quarters ended June 30, 2021 and 2020, respectively, and a net income of $11.9 million and net loss of $7.0 million for the six months ended June 30, 2021 and 2020, respectively.
Liquidity and Capital Resources
Sources and Uses of Funds
Global Indemnity Group, LLC is a holding company. Its principal asset is its ownership of the shares of its direct and indirect subsidiaries, including those of its insurance companies: United National Insurance Company, Diamond State Insurance Company, Penn-America Insurance Company, Penn-Star Insurance Company, Penn-Patriot Insurance Company, and American Reliable Insurance Company.
Global Indemnity Group, LLC’s short term and long term liquidity needs include but are not limited to the payment of corporate expenses, debt service payments, distributions to shareholders, and share repurchases. In order to meet their short term and long term needs, Global Indemnity Group, LLC’s principal sources of cash includes investment income, dividends from subsidiaries, other permitted disbursements from its direct and indirect subsidiaries, reimbursement for equity awards granted to employees and intercompany borrowings. The principal sources of funds at these direct and indirect subsidiaries include underwriting operations, investment income, proceeds from sales and redemptions of investments, capital contributions, intercompany borrowings, and dividends from subsidiaries. Funds are used principally by these operating subsidiaries to pay claims and operating expenses, to make debt payments, fund margin requirements on interest rate swap agreements, to purchase investments, and to make distribution payments. In addition, the Company periodically reviews opportunities related to business acquisitions and as a result, liquidity may be needed in the future.
62
GBLI Holdings, LLC is a holding company which is a wholly-owned subsidiary of Penn-Patriot Insurance Company. GBLI Holdings, LLC’s principal asset is its ownership of the shares of its direct and indirect subsidiaries which include United National Insurance Company, Diamond State Insurance Company, Penn-America Insurance Company, Penn-Star Insurance Company, and American Reliable Insurance Company. GBLI Holdings, LLC is dependent on dividends from its subsidiaries to meet its debt obligations as well as corporate expense obligations.
As of June 30, 2021, the Company also had future funding commitments of $31.2 million related to investments that are currently in their harvest period and it is unlikely that a capital call will be made.
The future liquidity of both Global Indemnity Group, LLC and GBLI Holdings, LLC is dependent on the ability of its subsidiaries to pay dividends. Global Indemnity Group, LLC and GBLI Holdings, LLC’s insurance companies are restricted by statute as to the amount of dividends that they may pay without the prior approval of regulatory authorities. The dividend limitations imposed by state laws are based on the statutory financial results of each insurance company that are determined by using statutory accounting practices that differ in various respects from accounting principles used in financial statements prepared in conformity with GAAP. See “Regulation - Statutory Accounting Principles” in Item 1 of Part I of the Company’s 2020 Annual Report on Form 10-K. Key differences relate to, among other items, deferred acquisition costs, limitations on deferred income taxes, reserve calculation assumptions and surplus notes. See Note 20 of the notes to the consolidated financial statements in Item 8 of Part II of the Company’s 2020 Annual Report on Form 10-K for further information on dividend limitations related to the Insurance Companies. The Insurance Companies did not declare or pay any dividends during the quarter and six months ended June 30, 2021.
Cash Flows
Sources of operating funds consist primarily of net written premiums and investment income. Funds are used primarily to pay claims and operating expenses and to purchase investments. As a result of the distribution policy, funds may also be used in the future to pay distributions to shareholders of the Company.
The Company’s reconciliation of net income (loss) to net cash provided by operations is generally influenced by the following:
the fact that the Company collects premiums, net of commissions, in advance of losses paid;
the timing of the Company’s settlements with its reinsurers; and
the timing of the Company’s loss payments.
Net cash provided by operating activities was $47.5 million and $52.4 million for the quarters and six months ended June 30, 2021 and 2020, respectively. The decrease in operating cash flows of approximately $4.9 million from the prior year was primarily a net result of the following items:
Net premiums collected
308,353
285,317
23,036
Net losses paid
(148,453
(131,203
(17,250
Underwriting and corporate expenses
(126,144
(120,897
(5,247
18,952
23,138
(4,186
Net federal income taxes recovered
(5,478
Interest paid
(5,220
(9,423
4,203
(4,922
See the consolidated statements of cash flows in the consolidated financial statements in Item 1 of Part I of this report for details concerning the Company’s investing and financing activities.
63
Liquidity
The Company’s liquidity could be negatively impacted by the cancellation, delays, or non-payment of premiums related to the ongoing COVID-19 pandemic and its lasting impacts. There is continued risk that legislation could be passed or there could be a court ruling which would require the Company to cover business interruption claims regardless of terms, exclusions including the virus exclusions contained within the Company’s Commercial Specialty and Farm, Ranch & Stable policies, or other conditions included in policies that would otherwise preclude coverage which would negatively impact liquidity. In addition, the liquidity of the Company’s investment portfolio could be negatively impacted by disruption experienced in global financial markets. Management is taking actions it considers prudent to minimize the impact on the Company’s liquidity. However, given the ongoing uncertainty surrounding the duration, magnitude and geographic reach of COVID-19, the Company is regularly evaluating the impact of COVID-19 on its liquidity.
Other than the items discussed in the preceding paragraphs, there have been no material changes to the Company’s liquidity during the quarter and six months ended June 30, 2021. Please see Item 7 of Part II in the Company’s 2020 Annual Report on Form 10-K for information regarding the Company’s liquidity.
Capital Resources
There have been no material changes to the Company’s capital resources during the quarter and six months ended June 30, 2021. Please see Item 7 of Part II in the Company’s 2020 Annual Report on Form 10-K for information regarding the Company’s capital resources.
Co-obligor Financial Information
The Company is providing the following information in compliance with Rule 13-01 of Regulation S-X, “Financial Disclosures about Guarantors and Issuers of Guaranteed Securities” with respect to the Company’s 7.875% Subordinated Notes due in 2047 (“2047 Notes”). Global Indemnity Group, LLC (parent co-obligor) and GBLI Holdings, LLC (subsidiary co-obligor) are co-obligors of the 2047 Notes. GBLI Holdings, LLC is a wholly-owned indirect subsidiary of Global Indemnity Group, LLC. The 2047 Notes are subordinated unsecured obligations and rank (i) senior to the companies’ existing and future capital stock, (ii) senior in right of payment to the companies’ future junior subordinated debt, (iii) equally in right of payment with any existing unsecured, subordinated debt that the companies have issued or may issue in the future that ranks equally with the 2047 Notes, and (iv) subordinate in right of payment to any of the companies’ future senior debt. In addition, the 2047 Notes are structurally subordinated to all existing and future indebtedness, liabilities and other obligations of Global Indemnity Group, LLC’s subsidiaries, except for GBLI Holdings, LLC.
GBLI Holdings, LLC is a subordinated co-obligor with respect to the 2047 Notes with the same obligations and duties as Global Indemnity Group, LLC under the Indenture (including the due and punctual performance and observance of all of the covenants and conditions to be performed by Global Indemnity Group, LLC, including, without limitation, the obligation to pay the principal of, and interest on, the 2047 Notes when due whether at maturity, by acceleration, redemption or otherwise), and with the same rights, benefits and privileges of Global Indemnity Group, LLC thereunder. Notwithstanding the foregoing, GBLI Holdings, LLC's obligations (including the obligation to pay the principal of and interest in respect of the 2047 Notes) are subject to subordination to all monetary obligations or liabilities of GBLI Holdings, LLC owing to any regulated reinsurance or insurance company that is a direct or indirect subsidiary of Global Indemnity Group, LLC, in addition to indebtedness of GBLI Holdings, LLC for borrowed money. If Global Indemnity Group, LLC pays any amount with respect to the subordinated note obligations, Global Indemnity Group, LLC is entitled to be reimbursed by GBLI Holdings, LLC within 10 business days after a demand is made to GBLI Holding, LLC by Global Indemnity Group, LLC.
64
The following tables present summarized financial information for Global Indemnity Group, LLC (Parent co-obligor) and GBLI Holdings, LLC (Subsidiary co-obligor) on a combined basis after transactions and balances within the combined entities have been eliminated.
Parent and Subsidiary Co-obligors
The following table presents the summarized balance sheet information as of June 30, 2021 and December 31, 2020.
Intercompany note receivable
2,100
11,283
Intercompany receivables
828
249,587
250,863
Total assets excluding investment in subsidiaries
314,080
324,229
Intercompany payables
5,103
5,515
155,829
158,423
The following table presents the summarized statement of operations information for the six months ended June 30, 2021.
Total revenue
12,452
Intercompany interest income
Intercompany interest expense
Loss before income taxes (1)
(3,102
Net loss (1)
(434
excludes equity in the earning of a subsidiary
Off Balance Sheet Arrangements
The Company has no off balance sheet arrangements.
Cautionary Note Regarding Forward-Looking Statements
Some of the statements under “Management's Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report may include forward-looking statements within the meaning of Section 21E of the Security Exchange Act of 1934, as amended, that reflect the Company’s current views with respect to future events and financial performance. Forward-looking statements are statements that are not historical facts. These statements can be identified by the use of forward-looking terminology such as "believe," "expect," "may," "will," "should," "project," "plan," "seek," "intend," or "anticipate" or the negative thereof or comparable terminology, and include discussions of strategy, financial projections and estimates and their underlying assumptions, statements regarding plans, objectives, expectations or consequences of identified transactions or natural disasters, and statements about the future performance, operations, products and services of the companies.
The Company’s business and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experience may materially differ from those contained in any forward-looking statements. See “Risk Factors” in Item 1A of Part I in the Company’s 2020 Annual Report on Form 10-K for risks, uncertainties and other factors that could cause actual results and experience to differ from those projected. The Company’s forward-looking statements speak only as of the date of this report or as of the date they were made. The Company undertakes no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
65
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the quarter ending June 30, 2021, global equities rose approximately 7.6% with U.S. equities outperforming, returning approximately 8.6%. U.S. fixed income returned approximately 2.9% as 10 year treasury rates declined during the quarter to end at 1.45%. Inflation ticked up globally, though the Federal Reserve continued to emphasize the transitory nature of inflation. U.S. inflation in particular experienced a faster-than-expected acceleration over the quarter. Vaccinations continued to advance globally and case counts generally moved lower, although the spread of a new variant with higher infectiousness underscored a key risk for the economic recovery.
The Company’s investment grade fixed income portfolio continues to maintain high quality with an A+ average rating and a duration of 4.5 years. Portfolio purchases were focused within US Treasury, MBS, and investment grade credit securities. These purchases were funded primarily through cash inflows, sales of US Treasury and MBS securities, as well as maturities and paydowns. During the second quarter, the portfolio’s allocation to investment grade credit increased, while the portfolio’s exposure to US Treasuries decreased. There have been no other material changes to the Company’s market risk since December 31, 2020. Please see Item 7A of Part II in the Company’s 2020 Annual Report on Form 10-K for information regarding the Company’s market risk.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2021. Based upon that evaluation, and subject to the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2021, the design and operation of the Company’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II-OTHER INFORMATION
The Company is, from time to time, involved in various legal proceedings in the ordinary course of business. The Company maintains insurance and reinsurance coverage for risks in amounts that it considers adequate. However, there can be no assurance that the insurance and reinsurance coverage that the Company maintains is sufficient or will be available in adequate amounts or at a reasonable cost. The Company does not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material adverse effect on its business, results of operations, cash flows, or financial condition.
The Company’s results of operations and financial condition are subject to numerous risks and uncertainties described in Item 1A of Part I in the Company’s 2020 Annual Report on Form 10-K, filed with the SEC on March 12, 2021. The risk factors identified therein have not materially changed except as follows:
The Company may be subject to adverse foreign taxes related to its historic non-US subsidiaries.
Although the Company and its subsidiaries have eliminated most of their historic foreign subsidiaries, the statute of limitations remains open in certain foreign jurisdictions, and it is possible that the Company could be subject to materially adverse foreign taxes with respect to its historic operations. Such adverse foreign taxes could also potentially arise as a result of retroactive changes in law.
The Company’s Share Incentive Plan allows employees to surrender the Company’s class A common shares as payment for the tax liability incurred upon the vesting of restricted stock. There were 7,100 shares surrendered by the Company’s employees during the quarter ended June 30, 2021. All class A common shares surrendered by the Company’s employees are held as treasury stock and recorded at cost until formally retired.
Defaults upon Senior Securities
None.
Chief Operating Officer Agreement with Reiner R. Mauer effective May 14, 2021 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated May 17, 2021 (File No. 001-34809)).
22.1
List of Co-Issuer Subsidiaries (incorporated by reference to Exhibit 22.1 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (File No. 001-34809)).
31.1+
Certification of Principal Executive Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2+
Certification of Chief Financial Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1+
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2+
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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Filed or furnished herewith, as applicable.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Registrant
Dated: August 6, 2021
By:
/s/ Thomas M. McGeehan
Thomas M. McGeehan
Chief Financial Officer
(Authorized Signatory and Principal Financial and Accounting Officer)